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4000 - Advisory Opinions

Management Interlocks with Federal Land Bank Association


September 8, 1988

Pamela E. F. LeCren, Senior Attorney

The following letter which confirms our August 25th telephone conversation is in response to your request for the FDIC's opinion on whether a federal land bank association is a depository institution for the purposes of the Depository Institution Management Interlocks Act (12 U.S.C. 3201 et. seq., "Interlocks Act"). For the reasons more fully discussed below, we are of the opinion that a federal land bank association is not a depository institution as that term is defined in the Interlocks Act.


The Interlocks Act prohibits management officials from serving two or more unaffiliated "depository institutions" depending upon the size and location of the institutions in question. The term "depository institution" is defined by the Interlocks Act to mean "a commercial bank, a savings bank, a trust company, a savings and loan association, a building and loan association, a homestead association, a cooperative bank, an industrial bank, or a credit union." (12 U.S.C. 3203(1)). It has been the Legal Division's opinion for some time that this definition is enumerative and not illustrative, i.e., in order for an entity to be considered a depository institution for the purposes of the Interlocks Act the entity must fall within one of the classifications of institutions listed in the definition. We do not apply a functional test and have, for the most part, simply deferred to state law on the issue of whether a particular entity is a commercial bank or a savings bank or a building and loan association etc.1 In order to resolve your question, therefore, we must determine whether a federal land bank association falls within one of the enumerated categories of depository institutions covered by the Interlocks Act.2


Federal land banks are "federally chartered instrumentalities of the United States" established by Congress to make long-term real estate related loans to farmers and ranchers through federal land bank associations which are also federally chartered. (12 U.S.C. 2011 et. seq.). Federal land banks and federal land bank associations are subject to the sole oversight of the Farm Credit Administration. Federal land banks may issue voting and non-voting stock which stock may only be held by a federal land bank association, other direct borrowers (eligible persons seeking a loan in an area where there is no active federal land bank association or in an area where the local association has been declared insolvent may borrow directly from the federal land bank), or the Governor of the Farm Credit Administration. A federal land bank association may be organized in any rural area by ten or more persons who desire to borrow money from a federal land bank. Articles of association are drafted describing the territory within which the association proposes to operate and are forwarded to the federal land bank for that area along with an agreement to subscribe on behalf of the association to stock issued by the federal land bank equal to not less than $5 nor more than $10 per $100 of the aggregate loans which the Association wishes to obtain from the federal land bank. Each member of the Association must in turn become a stockholder of the association. (Associations may issue voting and non-voting stock which may only be held by members of the association.) If an application for membership in the association from an eligible person is approved. and the individual's loan from the federal land bank is granted, the member must subscribe to stock in the association in an amount not less than 5% nor more than 10% of the face amount of the loan. The association then in turn must purchase a similar amount of stock in the federal land bank. Federal land bank associations arrange for loans on behalf of their members from the federal land bank but do not make any loans themselves.

Upon inquiring with the General Counsel's office of the Farm Credit Administration we were informed that the legal relationship between a member of an association and the association itself is somewhat analogous to the relationship between a depositor of a mutual savings bank or a savings and loan association and those types of institutions, i.e., that of an owner. Unlike the latter, however, this ownership interest does not, in the Farm Credit Administration's opinion, give rise to a deposit. The stock issued to members is described by that office as in reality being more akin to an interest surcharge on the loan obtained from the federal land bank. In most instances there is never any money received by the Association from the members. (Although "advance repayment accounts" are sometimes held by Associations and certain small denomination bonds issued by Associations may be functionally similar to bank certificates of deposit, the Farm Credit Administration indicates that it would be improper to characterize federal land bank associations as being engaged in the business of taking deposits.)


Upon considering all of the above it is our opinion that a federal land bank association is not a depository institution subject to the Interlocks Act. While it is true that a federal land bank association bears a distinct resemblance to a cooperative bank3 and/or a building and loan association,4 it is inappropriate in our opinion to utilize a functional approach and treat any organization that may be similar to a listed entity as being covered by the Act. (As indicated earlier the definition simply does not encompass all financial intermediaries.) It is all the more inappropriate when the entity in question is not even engaged in the business of taking deposits.

If Congress had wanted to bring the federal land bank system within the scope of the Interlocks Act it could have easily done so by expressly naming federal land banks, federal land bank associations, and the other component parts of the federal land bank system. That it did not provide further evidence that the Act was not intended to cover the entities composing that system. Similar evidence comes from other federal statutes which contain references to cooperative banks and building and loan associations. The Federal Savings and Loan Insurance Corporation ("FSLIC") insures the accounts of, among other things, cooperative banks and building and loan associations. (12 U.S.C. section 1726(a)). According to legal staff at the Federal Home Loan Bank Board the terms cooperative bank and building and loan association have not been construed in the generic but are considered to refer to creatures of state law such as exist in Massachusetts and New Hampshire. Federal land bank associations are thus considered ineligible for FSLIC insurance coverage. Likewise, section 408 of the National Housing Act (12 U.S.C. section 1730a) dealing with the regulation of savings and loan holding companies refers to cooperative banks and building and loan associations. The reference in that provision of law simply could not have been intended to cover federal land bank associations as such institutions cannot be acquired by holding companies. One can safely assume that as Congress used the identical list of entities for the purpose of defining "depository institution" as it used in other federal statutes that Congress intended to cover exactly the same entities thereby.5 As neither the term cooperative bank nor building and loan association as used in the National Housing Act encompasses a federal land bank association, neither should either term as used in the Interlocks Act be construed to do so.

Finally, as the Farm Credit Administration is given sole regulatory oversight with respect to the federal land bank system there is no reason to believe that Congress intended to subject that system to an Act administered by the federal banking agencies; especially an Act concerned with promoting competition and preventing conflicts of interest between institutions that take deposits. Those concerns were already addressed by 12 C.F.R. section 612.2120 which set forth the rules of conduct for the district directors who oversee the affairs of the Federal land banks as well as for association directors. In particular section 612.2120(d) provided that a director shall "[c]onsider the potential conflict of interest arising from his employment by, or directorship of, other lending institutions." (12 C.F.R. 612.2120(d) (1973)).6

1 In 1984 it was determined that the FDIC would treat state chartered entities which operate substantially in the same manner as industrial banks, and which are thus eligible for deposit insurance, as industrial banks within the meaning of the Interlocks Act. (See sections 3(a) and 3(l)(1) of the Federal Deposit Insurance Act as amended by the Garn-St Germain Depository Institutions Act of 1982, Pub. L. No. 97-320, Oct. 15, 1982.) In brief, it was decided that it would be an anomaly to consider an entity which engages in the business of accepting "deposits" as that term is defined for federal deposit insurance entities are thus treated as industrial banks subject to the Interlocks Act regardless of whether the state in question considers them to be industrial banks. Go back to Text

2 Although one of the purposes of the Interlocks Act was clearly to reduce the anticompetitive impact of management interlocks "on the flow of credit and financial policies, and practices to the detriment of communities, neighborhoods, small businessmen, home buyers, farmers, consumers, and others in need of credit on the best terms possible" (H.R. Rep. No. 95-1383, 95th Cong., 2d Sess. 14 (1978)) the fact remains that the definition of depository institution simply does not cover all of the different types of financial intermediaries which provide credit. The one characteristic, however, which all of the enumerated categories of depository institutions do have in common is the taking of deposits. Go back to Text

3 See 9 CJS COOPERATIVE BANKS, section 958 and BUILDING and LOAN ASSOCIATION, section 54. "The building and loan association, credit union, federal land bank associations, labor banks, savings and loan associations and savings banks are forms of cooperative banks." G. Munn, Encyclopedia of Banking & Finance, 8th ed., p. 218 (1983). Go back to Text

4 "[A] building and loan association may be defined as an organization of people entitled to equal privileges, cooperating . . . in the creation of a common fund which may be loaned to any member . . ., and sharing the profits and losses of the association according to their respective interests." 13 AM. JUR. 2d Building and Loan Associations section 1. Go back to Text

5 Sutherland on Statutory Construction, 4th ed. section 51.02 (1984). Go back to Text

6 The Interlocks Act was enacted by Congress in 1978 some five years later. The Farm Credit Administration regulations were amended in 1983 to prohibit employees of a system institution from serving as an officer or director of any commercial bank, savings and loan institution or other non-system financial institution. (12 C.F.R. 612.2150(b)(6) (1988)). The term "employee" means any salaried officer or part-time, full-time, or temporary employee. Go back to Text

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