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4000 - Advisory Opinions
Management Interlocks with Federal Land Bank
Association
FDIC-88-59
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
{{4-28-89 p.4361}}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.
DESCRIPTION OF THE 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
DESCRIPTION OF FEDERAL LAND BANK ASSOCIATIONS
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
{{4-28-89 p.4362}}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.)
DISCUSSION
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
bank 3
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
{{4-28-89 p.4363}}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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