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4000 - Advisory Opinions

Applicability of Community Reinvestment Act to a Trust Company

FDIC-91-73 August 16, 1991 Alan J. Kaplan, Senior Counsel

In your memorandum dated August 13, 1991, to Alan Kaplan, you asked that we provide guidance on whether the exemption in section 345.101 of the FDIC's regulations (12 C.F.R. § 345.101) ("Interpretive Rule'') to the Community Reinvestment Act ("Act'') would apply to *** ("Company").

Short Answer

Because it is engaged in lending and deposit activities that are not incidental to its trust operations, the Company does not qualify for the exemption from the Act provided by the Interpretive Rule.

The Interpretive Rule

As you know, the Interpretive Rule states, in essence, that certain "special purpose banks and trust companies not engaged in lending" are not bound by the FDIC's regulations issued pursuant to the Act. More specifically, it states that the term "State nonmember bank. . . [for purposes of Part 345 of the FDIC's regulations] does not include banks that engage solely in correspondent banking business, trust company business, or acting as a clearing agent." [Emphasis added.] Although the term "solely" implies that the applicable bank must be engaged in nothing other than one of the listed activities, a prior sentence in the Interpretive Rule states that "it would be pointless to. . . assess the credit granting record of institutions that are not organized to grant credit to the public. . . other than as an incident to their specialized operations." [Emphasis added.]

A fair reading of the Interpretive Rule, with the recognition of its stated purpose, supports the conclusion that this exemption from the Act was intended to apply to entities who are engaged in the above-mentioned activities but who also may be engaged in other activities incidental to the "specialized operations" of those activities.1 Thus, for example, a trust company that makes certain loans to its trust customers related to the trust services provided to those customers likely would come within the exemption provided by the Interpretive Rule.2 This factual determination, however, would have to be made on a case-by-case basis.

Investors Bank and Trust

Lending Activity.  According to the information provided to us, the Company does not routinely engage in extending credit to the public on either a wholesale or retail basis. It does, however, make loans to its trust customers and officers and employees of its parent company. As of June 30, 1991, such loans totalled approximately $*** million, or 5.3% of the Company's total assets. The loans were made, in part, for the "purchase of real estate, home improvement and personal investment." In our view, this lending activity is outside the intended scope of the Interpretive Rule. It appears that such loans were not made as an "incident" to the trust operations of the company, but, perhaps, as a convenience to its trust customers and individuals employed by its parent company. This lending activity is not tied to the "specialized operations" of the trust company contemplated (and required) by the Interpretive Rule. Thus, the Company would be subject to the Act and Part 345.3

Deposit Activity.  As also indicated in the materials provided to us, the Company does not acquire deposits from the "general public," but does accept deposits (other than trust funds) from trust customers and employees of its parent company. These deposits, as of June 30, 1991, totalled approximately $*** million, or 89.2% of the Company's total assets. Because the deposits in issue are not funds either awaiting investment or otherwise held in connection with the "specialized operations" in which the Company is engaged, it cannot be said that this deposit activity is incidental to the Company's trust business. Thus, irrespective of whether the loan activity discussed above would disqualify the Company from the exemption provided by the Interpretive Rule, this deposit activity would alone place the Company outside the intended scope of the Interpretive Rule. Therefore, the exemption would not be available to the Company.

1This conclusion is supported by the Legal Division memorandum dated October 3, 1978, to the FDIC Board of Directors ("Board Memorandum") on the Board's consideration and adoption of Part 345 and the Interpretive Rule. The memorandum states, in pertinent part, that "the interpretation would apply to a small number of special purpose trust companies engaged primarily in corporate trust accounts. . . and [which] receive deposits solely as an incident of the trust business. . . ." [Emphasis added.] Go back to Text

2In a letter dated March 9, 1979, by FDIC Boston Regional Counsel Thomas Lawless to a trust company in Boston, Massachusetts ("Lawless Letter"), Mr. Lawless states: "[permissible lending within the context of the Interpretive Rule] applies only when the extension of credit facilitates the accomplishment of the specialized objectives of the bank, as is evidently the case with extensions of credit related to securities transactions under some circumstances, for example." Go back to Text

3As noted in the Board Memorandum, the Interpretive Rule was intended to apply to "trust companies which are not engaged in credit granting activities." This conclusion also is supported by the Lawless Letter. Go back to Text

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