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4000 - Advisory Opinions
Back Office Facilities Operated by Subsidiaries
FDIC--99--2
January 26, 1999
Robert C. Fick, Counsel
You have asked whether "back office facilities" established
and operated by an operating subsidiary of a State non-member bank
outside of the bank's main office or branch locations would be
considered "domestic branches" under the Federal Deposit
Insurance Act (the "FDI Act," 12 U.S.C. § 1811 et
seq.).
You indicated that the State non-member bank (the "Bank")
currently operates back office facilities in Ohio and Georgia. The Bank
now proposes to transfer those operations and the employees assigned to
those operations to a wholly-owned subsidiary (the "Subsidiary").
The Bank proposes to enter into an appropriate servicing agreement with
the Subsidiary pursuant to which the Subsidiary would provide certain
loan origination services and loan servicing for various open-end and
closed-end lending programs offered by the Bank.
In particular, the Subsidiary would engage in solicitation
activities (e.g., mailing applications and prescreening), receipt of
completed applications, and review and underwriting of such
applications. After a loan has been booked by the Bank, the Subsidiary
would provide servicing for the loan which may include posting debits
and credits to the loan account, calculating interest charges and fees,
and providing customer service. The Subsidiary may disburse loan
proceeds (i.e., mail a check or electronically credit the proceeds to a
merchant's or a dealer's account) on closed-end loans. The Subsidiary
may also receive loan payments for processing to the loan accounts.
These activities would be carried out (i) pursuant to guidelines
established by the Bank, (ii) under the Bank's oversight, and (iii)
generally on a non-discretionary basis. In addition, certain Subsidiary
employees would have the authority to make discretionary decisions
regarding loan approvals or concerning loan modifications. Such
decisions would be consistent with the Bank's loan underwriting
policies and procedures. Finally, you indicated that there would be no
customer or public access to the Subsidiary's facilities.
Section 3(o) of the FDI Act provides, in pertinent part, that the
term "domestic branch" includes "any branch bank, branch
office, branch agency, additional office, or any branch place of
business located in any State of the United States . . . at which
deposits are received or checks paid or money
lent." 1
As noted in a previous letter to you regarding
{{2-29-00 p.4984.36}}back office
facilities, 2
there are no published court decisions that provide a comprehensive
interpretation of the term "domestic branch." However, the
definition of "domestic branch" is, in relevant part, identical
to the definition of
"branch" 3
in the National Bank Act, and there is substantial case law and agency
guidance interpreting that term.
Relying upon that case law and consistent with interpretations of
the National Bank Act's definition of "branch" by the Office of
the Comptroller of the Currency, the FDIC has applied a three-prong
test to determine whether a particular facility is a "domestic
branch." First, the facility must receive deposits, pay checks, or
lend money (these three activities are sometimes referred to as the
"core banking
functions"). 4
Second, the facility must be established by the bank, i.e.,
owned or rented by the
bank. 5
Third, the facility must provide the bank some advantage in its
competition for customers; it must offer the bank's customers some
convenience that gives the bank a competitive advantage over other
banks. 6
In this case, the Subsidiary's facilities would, among other
things, receive payments on loans. Such an activity has been held to
constitute receiving
deposits. 7
Consequently, the Subsidiary's facilities satisfy the first prong of
the test. 8
With regard to the establishment prong, you have
indicated that this Subsidiary is wholly-owned by the Bank. Therefore,
since the Subsidiary is owned by the Bank and subject to its control,
it may be strongly argued that its facilities would constitute places
established by the Bank. Therefore, the Subsidiary's
facilities satisfy the second prong of the test.
The third prong is whether the Subsidiary's facilities would offer
the Bank's customers some convenience that gives the Bank a
competitive advantage over other banks. In this regard you stated that
there would be no public access to the facilities and, specifically, no
in-person contact with customers of the Bank at the Subsidiary's
facilities. In particular, with respect to the receipt of loan
payments, customers will mail their loan payments to the facility, and
with respect to the disbursal of loan proceeds, the Subsidiary staff
will mail the check or credit the amount to an account (usually the
dealer's account in the case of a loan to purchase motor vehicle). All
other Bank communications with customers and potential customers would
be conducted by telephone or mail.
In view of the lack of any public access and the lack of any
potential for in-person contact with customers at these facilities, we
do not believe that such facilities would provide the Bank a
competitive advantage over other banks in attracting customers.
Customers would realize no special or extra convenience as a result of
the location of these offices. Telephone communication and mail are
methods of contacting customers that are available to all banks. From
the customer's perspective there is no practical difference whether
such facilities exist or not at a particular location. We conclude,
therefore, that the
{{2-29-00 p.4984.37}}Subsidiary's facilities described
above would provide no competitive advantage to the
Bank. 9
Consequently, since the Subsidiary's facilities described above do
not meet the third prong of the test for a branch, we conclude that
such facilities, do not constitute "domestic branches" under
section 3(o) of the FDI Act.
Please note that the opinions expressed herein represent the views
of the Legal Division staff and, like all staff opinions, are not
binding upon the FDIC or its Board of Directors. In addition, the
opinions expressed herein are based upon the facts as presented. Any
change in the facts or circumstances may result in different
conclusions.
If you have any further questions regarding this issue, please
contact me at your convenience.
1 12 U.S.C.
§ 1813(o). Go Back to Text
2 FDIC Unpub. Interp. Ltr., Subject: Back Office Facilities,
From Robert C. Fick to (July 29, 1997). Go Back to Text
3 12 U.S.C. § 36(j). Go Back to Text
4 See, Clarke v. Securities Industry
Ass'n, 479 U.S. 388, 409 (1987), First Nat'l Bank in Plant
City v. Dickinson, 396 U.S. 122, 135 (1969) ("Plant
City"). Go Back to Text
5 See, Independent Bankers Ass'n of America
v. Smith, 534 F.2d 921, 951 (D.C. Cir.), cert. denied,
429 U.S. 862 (1976); Independent Bankers Ass'n of New York v.
Marine Midland Bank, 757 F.2d 453, 463 (2d Cir. 1985). Go Back to Text
6 See, Plant City, 396 U.S. at 135-37;
Smith, 534 F.2d at 951. Go Back to Text
7 See, Smith, 534 F.2d at 940-41. Go Back to Text
8 Although the disbursal of loan proceeds raises an issue as
to whether the facilities are also places where "money [is]
lent" as that phrase is used in section 3(o) of the FDI Act, it is
not necessary to resolve that issue. Since section 3(o) of the FDI Act
lists the three core banking functions in the disjunctive, it is
sufficient for purposes of determining that a facility satisfies the
first prong of the test if the facility engages in only one of the
listed core banking functions. See, Plant City,
396 U.S. at 135. In this case the receipt of deposits alone is
sufficient to satisfy the first prong of the test. Go Back to Text
9 The Office of the Comptroller of the Currency has "long
maintained that if the public does not have access to a
bank-established facility, it is not a branch, even if core activities
are involved." OCC Interp. Ltr. 634 (July 23, 1993). Go Back to Text
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