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4000 - Advisory Opinions
Question regarding Interstate Contract Branching under
section 18(r) of the FDI Act
FDIC--06--01
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
{{8-31-06 p.4984.120}}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 law 5
-- "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
payments 11
[emphasis added]. And, although the Conferees did not fully explain
the agent bank's authority to "close
{{8-31-06 p.4984.121}}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 York 13
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.
1 12 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
2 P.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
3 Jeffrey 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
4 Section 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
5 H.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
6 Letter 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
7 Alfred 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
8 Id. 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
9 Jeffrey 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
10 Id. Go Back to Text
11 12 U.S.C. § 1828(r)(1). Go Back to Text
12 Id. 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
13 See N.Y. BANKING LAW § 105(b)
(2005). Go Back to Text
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