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4000 - Advisory Opinions

Interstate Contract Branching Arrangements Between State Nonmember Banks and Other Banks Permissible Subject to Same Conditions Imposed on Intrastate Contract Branching Arrangements


July 5, 1995

Jeffrey M. Kopchik, Counsel

You have asked 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 permitted by state law.

In 1993, the FDIC's General Counsel issued a staff advisory opinion that took the position that insured state nonmember banks that enter into agreements to have other banks (affiliated or nonaffiliated) within the same state provide certain banking services to their customers will not be required to apply to the FDIC for permission to establish and operate a new branch pursuant to § 303.2 of the FDIC's rules and regulations. FDIC Legal Division Staff Advisory Opinion 93--57, August 12, 1993. The Office of the Comptroller of the Currency's ("OCC") Chief Counsel had previously issued a similar no objection letter on October 8, 1992.1 On April 6, 1994, the OCC's Chief Counsel issued a no objection letter which expanded the scope of the previous OCC letter to include contract branching arrangements conducted by affiliated banks on an interstate basis.

Section 101(d) of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal") (P.L. 103-328, September 19, 1994) added a new § 18(r) to the Federal Deposit Insurance Act ("FDI Act''). This new subsection will permit, effective September 29, 1995, a bank subsidiary of a bank holding company to conduct certain basic banking services as agent for a depository institution affiliate without being considered a branch of that affiliate.2 Significantly, § 18(r)(4) provides that this section shall not be construed as affecting the authority of any depository institution to act as agent for another depository institution under any other provision of law.

On March 15, 1995, the "State" Comptroller issued an Order of General Application which provides that state chartered banks may enter into contract or accommodation branching arrangements with affiliated banks on an interstate basis without filing a branch application with the state Comptroller. The Order limits the accommodation services to accepting deposits to existing accounts, processing withdrawals, accepting loan payments, closing loans as agent, obtaining account information and accepting the submission of account maintenance information. However, the agency agreement must be submitted for review and contract branching cannot begin until the state Comptroller approves the arrangement in writing. The Order explicitly refers to § 101 of Riegle-Neal as well as the April 6, 1994 no objection letter by the OCC Chief Counsel.

Section 3(o) of the FDI Act defines a "domestic branch" as:

"[A]ny branch bank, branch office, branch agency, additional office, or any branch place of business . . . at which deposits are received or checks paid or money lent. . . ."
12 U.S.C. 1813(o). This definition has never been interpreted by a court of competent jurisdiction.

However, section 36(f) of the National Bank Act contains a definition of "branch" which is virtually identical to § 3(o) of the FDI Act, and which has been interpreted by the Supreme Court and several federal courts of appeals. First National Bank in Plant City v. Dickinson, 396 U.S. 122 (1969); Independent Bankers Association v. Smith, 534 F.2d. 921 (D.C. Cir. 1976), cert denied, 429 U.S. 862 (1976) ("Smith"); Independent Bankers Association v. Marine Midland, 757 F.2d. 453 (2d. Cir. 1986), cert denied, 476 U.S. 1186 (1986). In Smith, the D.C. Circuit held that:

"[A]ny facility that performs the traditional bank functions of receiving or disbursing funds is a "branch' of a national bank within the meaning of section 36(f) if (1) the facility is established ( i.e., owned or rented) by the national bank, and (2) it offers the bank's customers a convenience that gives the bank a competitive advantage over other banks (national or state) that do not operate similar facilities."

Smith, 534 F.2d. at 951-952. It is this line of reasoning that the FDIC utilized in Staff Advisory Opinion 93--57. The opinion states that since the bank providing the accommodation services is not established by the customer's bank, the accommodation branch is not a "branch" (for purposes of § 3(o) of the FDI Act) of the customer's bank even though it may be receiving deposits or cashing checks, both of which are traditional banking activities identified in FDI Act § 3(o).

FDIC Legal Division Staff Advisory Opinion 93--57 was limited to the intrastate context because only that question was presented for review at the time. However, the analysis contained in that letter and summarized immediately above would be equally applicable to contract branching between banks conducted on an interstate basis. Similarly, while your question concerning interstate contract branching arises in the context of affiliated banks, Advisory Opinion 93--57 permits intrastate contract branching between affiliated and nonaffiliated banks. Thus, I see no reason why interstate contract branching should not be permitted between nonaffiliated banks.

In view of the OCC's 1994 no objection letter permitting interstate contract branching by affiliated national banks and new § 18(r) of the FDI Act, which we read to soon permit a bank affiliate of another depository institution to act as agent for that institution on both an intrastate and interstate basis (in addition to any other contract branching authority it may currently have under any other provisions of law), I am of the opinion that FDIC Legal Division Staff Advisory 93--57 should be construed to permit interstate contract branching arrangements between state nonmember banks and other banks (whether affiliated or not), subject to the same conditions which the FDIC has imposed on intrastate contract branching arrangements.

This letter should not be construed as approving any form of contract or accommodation branching under facts or circumstances which differ from those set forth in this letter and/or FDIC Advisory Opinion 93--57. Thus, the services that may be provided by a service bank located in another state are limited to those described in FDIC Advisory Opinion 93--57 and do not include, for example, opening new accounts.

I trust that this letter is responsive to your question. Please feel free to contact me if you have any further questions.

1 The staff of the Board of Governors of the Federal Reserve System ("Fed") has informed us that the Fed follows the OCC, but they have not published a written opinion on this question. Go back to Text

2 Section 18(r) also will permit a savings association which was an affiliate of a bank on July 1, 1994 to conduct activities as agent on behalf of that bank, with certain restrictions. Go back to Text

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