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4000 - Advisory Opinions

Question regarding Interstate Contract Branching under section 18(r) of the FDI Act


June 30, 2006

Mark L. Handzlik, Honors Attorney

By letter and subsequent telephone conversations and email you asked the Federal Deposit Insurance Corporation's ("FDIC") New York Regional Office ("NYRO") what the FDIC would require of Bank X ("X") under section 18(r) of the Federal Deposit Insurance Act ("FDI Act") ("Section 18(r)"),1 if X chose to conduct a variety of banking transactions for clients of Bank "Y" ("Y") at X, and for X clients at Y, without each bank becoming a branch of the other institution. Although your correspondence to the NYRO did not fully indicate what activities you wished to conduct at each institution, you did inquire as to whether Section 18(r) permits payment of withdrawals. After the FDIC addressed your first inquiry, you sought clarification of the term "close loans" within the meaning of 18(r), explaining that X and Y would each be "responsible for evaluating and granting or denying its own loans and disbursing the proceeds thereof [but each would] close a loan [for the other] (i.e., have the documents properly executed), receive a payoff or payment." This letter, which responds to all of your inquiries, supersedes our earlier response.

Your letter indicated that Y is a state member bank located in New York, with branch offices *** and ***. Y is jointly regulated by the Federal Reserve Bank of New York and the New York State Department of Banking. X is a state nonmember bank located in Pennsylvania, with a branch office in *** that is between *** and *** miles south of the New York State border, and approximately *** miles south of Y's *** office. X is jointly regulated by the FDIC and the Pennsylvania Department of Banking. Y and X are affiliated through Z ("Z"), a bank holding company. Z is the parent corporation for both X and ZZ ("ZZ"), which serves as the parent for Y.

I. Discussion

a.  The FDIC Has Interpreted Section 18(r) As Permitting An Interstate Affiliate To Conduct Certain Transactions For Customers Of A State Nonmember Bank, Including Payment of Withdrawals, Without Becoming A Branch Of The State Nonmember Bank.

On September 29, 1994, Section 18(r) was enacted as part of the Riegle-Neal Act ("Riegle-Neal"),2 and was intended to authorize banks to perform basic banking services as agents for each other,3 without each bank becoming a branch of the other institution.4 Section 18(r) describes the services of the agent bank as receiving deposits, renewing time deposits, closing loans, servicing loans, and receiving payments on loans and other obligations, however, the statutory list was not intended to exclude those agency activities which are permissible under other provisions of law5 -- "Congress was clearly aware that federal [bank regulatory agencies] had . . . taken the position that other provisions of law permitted agency relationships between affiliated banks without implicating branching restrictions"6 [emphasis added].

In 1993, prior to the enactment of Riegle-Neal, the then FDIC General Counsel Byrne issued an advisory opinion letter ("Advisory Opinion 93--57") explaining under what circumstances, and to what extent, state nonmember banks may provide services to each other's customers without filing a branch application with the FDIC, and receiving the FDIC's prior written consent.7 Advisory Opinion 93--57 identified this relationship as "Contract Branching," and it concluded that state nonmember banks may enter into Contract Branching agreements with other banks if (1) each bank is located in the same state; (2) the banks involved enter into an agreement at arms-length, "which adequately addresses the nature of the services to be provided and the rights and responsibilities of each party;" (3) the agreement complies with applicable state laws and regulations concerning branching; and (4) the range of permissible activities specified in the agreement is limited to routine activities which may otherwise be conducted at an ATM or teller window of the customer bank: accepting deposits; paying withdrawals; issuing money orders, travelers' checks or similar instruments; cashing checks; receiving loan payments; and disbursing loan proceeds.8 [emphasis added]

After the enactment of Riegle-Neal, Advisory Opinion 93--57 was extended to interstate Contract Branching in an advisory opinion letter by the then FDIC Legal Counsel Jeffrey M. Kopchik ("Advisory Opinion 95--22").9 The issue addressed in Advisory Opinion 95--22 was whether a state nonmember bank may enter into an interstate Contract Branching arrangement with an affiliated bank located in another state, when such an arrangement is otherwise permitted by state law. In light of Advisory Opinion 93--57 (which was limited to intrastate Contract Branching) and Section 18(r), Advisory Opinion 95--22 concluded that "interstate [C]ontract [B]ranching arrangements between state nonmember banks and other banks (whether affiliated or not) [are permissible,] subject to the same conditions which the FDIC . . . imposed on intrastate [C]ontract and [B]ranching arrangements in Advisory Opinion 93--57."10

b.  Congress Intended For Section 18(r) To Allow Agent Banks To Perform "Ministerial" Lending Functions.

In the House Conference Report on H.R. 3841, the House version of Riegle-Neal and Section 18(r), the Conferees explained that the agent bank's authority to "service loans" includes "ministerial" lending functions such as providing loan applications, assembling loan documents, providing a location for returning documents necessary for making the loan, providing loan account information, and receiving loan payments11 [emphasis added]. And, although the Conferees did not fully explain the agent bank's authority to "close loans," they did say that that Section 18(r) does not extend to any activity that an agent (bank) is prohibited from conducting as principal (bank) under applicable federal or state law,12 or to "non-ministerial" lending services, such as making credit decisions, evaluating loan applications, and disbursing loan proceeds.

Your inquiry indicates that X would not evaluate loan applications or make credit decisions on behalf of Y. This is consistent with the Congressional intent that an agent bank may not engage in "non-ministerial" lending services for the other. Your inquiry also states that X would "close a loan" for Y and you describe "closing a loan" as "having the documents properly executed [and] receiving a payoff or payment". Although you do not explain what "having the documents properly executed" entails, so long as this function is ministerial in nature, it is permissible under Section 18(r). As indicated above, "receiving a payoff or payment" is ministerial and is permissible under Section 18(r).

II. Conclusion

Section 18(r) would permit X's customers to conduct transactions at Y offices without X filing a branch application, and without obtaining prior written consent from the FDIC, if the transactions conducted are ministerial in nature, limited by a written agreement (entered into at arms-length) and the arrangement is permissible under applicable state and federal law. This includes paying withdrawals, receiving payments and engaging in other ministerial loan activities.

This letter is not intended to, and does not address the application of the laws of New York13 and/or Pennsylvania14 to Contract Branching, and does not address the application of Section 18(r) to FSB's customers conducting transactions at X's offices because Y's primary federal regulator, the Federal Reserve Bank of New York, is the appropriate agency to address X's activities.

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. This letter should not be construed as approving any form of contract for Contract Branching or applying to any accommodation branching under facts or circumstances that differ from those set forth in this letter. Should you have any additional questions, please feel free to contact me at (202) 898-3809, or New York Regional Counsel Barbara A. Monheit at (917) 320-2800.

112 U.S.C. § 1828(r)(1) ("Any bank subsidiary of a bank holding company may receive deposits, renew time deposits, close loans, service loans, and receive payments on loans and other obligations as an agent for a depository institution affiliate."). Go back to Text

2P.L. 103--328, 108 Stat. 3228, September 29, 1994. Section 101(d) of Riegle-Neal added a new section 18(r) to the Federal Deposit Insurance Act, codified at 12 U.S.C. § 1828(r), which became effective on September 29, 1995. Go back to Text

3Jeffrey M. Kopchik, "Interstate Contract Branching Agreements Between State Nonmember Banks And Other Banks Permissible Subject To Same Conditions Imposed On Intrastate Contract Branching Agreements," 95 Op. FDIC 22 (July 5, 1995). Go back to Text

4Section 3(o) of the FDI Act defines a domestic branch as "any branch bank, branch office, branch agency, additional office, or any branch place of business . . . [not including] an automated teller machine or remote service unit." To establish a domestic branch, generally, a state nonmember bank must obtain prior written consent from the FDIC pursuant to section 18(d) of the FDI Act, and FDIC regulations section 303.40 through 303.45. This normally requires submitting an application. Go back to Text

5H.R. Rep. No. 103--651 (1994) (Conf. Rep.) ("The Conferees do not intend that . . . subsection 18(r) affect the application of other provision of law that permit agency relationships between affiliated depository institutions.") Go back to Text

6Letter from Eric Thompson, Director, Bank Activities and Structure, November 28, 1995 (on file with the Office of the Comptroller of Currency), citing Cong. Rec. S 4820 (April 26, 1994). Go back to Text

7Alfred J. Byrne, "Insured State Nonmember Banks May Enter Into Contract Branching Agreements With Other Banks Located In the Same State Without Prior FDIC Approval," 93 Op. FDIC 57 (August 12, 1993). Go back to Text

8Id. Congress, however, intended to exclude disbursing loan proceeds as a permissible activity, referring to it as "non-ministerial". See infra at 3. Go back to Text

9Jeffrey M. Kopchik, "Interstate Contract Branching Agreements Between State Nonmember Banks And Other Banks Permissible Subject To Same Conditions Imposed On Intrastate Contract Branching Agreements," 95 Op. FDIC 22 (July 5, 1995). Go back to Text

10Id. Go back to Text

1112 U.S.C. § 1828(r)(1). Go back to Text

12Id. citing 12 U.S.C. § 1828(r)(3) ("[Although] [a]gency relationships may be used to promote operational efficiencies . . . they may not be used to evade applicable consumer protection, powers, and other laws of the State where the agent institution is situated."). Go back to Text

13See N.Y. BANKING LAW § 105(b) (2005). Go back to Text

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