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4000 - Advisory Opinions
State restrictions on the establishment of Interstate De
Novo Branches by Industrial Loan Companies
FDIC--06--02
July 28, 2006
Julie L. Williams, Chief Counsel, OCC
Doug Jones, Acting General Counsel, FDIC
Scott Alvarez, General Counsel, Board
You have asked our opinion regarding certain state legislation
intended to restrict interstate de novo branching by industrial loan
companies and industrial banks (collectively, "ILCs").
Specifically, we understand that some states have proposed or enacted
legislation that prohibits an out-of-state LLC, but not other types of
banks, from establishing a de novo branch in their states. These
restrictions have particular significance for those states that
generally permit out-of-state banks to establish de novo branches in
their states. With respect to such states, the question has been raised
whether these state ILC restrictions, if enacted, would affect the
ability of other out-of-state banks to establish de novo branches in
those states.
Riegle-Neal Act
The establishment of interstate de novo branches was first
authorized under Federal law in 1994 when Congress enacted the Riegle
Neal Interstate Banking and Branching
{{8-31-06 p.4984.122}}Efficiency Act of 1994 ("Riegle
Neal"). 1
Riegle Neal was generally intended to enhance and expand interstate
banking and branching. In accordance with that purpose, it added
provisions to both the Federal Deposit Insurance Act (the "FDI
Act") and the National Bank Act authorizing both state banks and
national banks to establish and operate interstate de novo branches
under certain conditions. 2
Specifically, Riegle Neal added section 18(d)(4) of the FDI Act,
12 U.S.C. § 1828(d)(4)
("Section 1828(d)(4)") regarding state nonmember banks and 12
U.S.C. § 36(g) ("Section 36(g)") regarding national
banks. 3
Section 36(g) applies to state member banks by virtue of section 9 of
the Federal Reserve Act. 4
These sections generally provide that the appropriate Federal banking
agency (i.e., the FDIC, for state nonmember banks; the Office of the
Comptroller of the Currency, for national banks; and the Federal
Reserve Board, for state member banks) may approve an application to
establish and operate a de novo branch in a state (other than the
bank's home state) in which the bank does not maintain a branch, if
the host state has a law in effect that meets certain
criteria. 5
These criteria include the requirements that the host state have a
law in effect that "(I) applies equally to all banks, and (II)
expressly permits all out-of-state banks to establish de novo branches
in such state." 6
For purposes of this discussion, these criteria are collectively
referred to as the "Host State Law Requirements." If a host
state's law fails either of these requirements, the appropriate
Federal banking agency would not be able to approve the establishment
of a de novo branch in the host state by any out-of-state
bank. 7
For purposes of Section 1828(d)(4), the term "bank" includes
any national bank and any state
bank. 8
Under the FDI Act, a "State bank" is defined to include "any
bank, banking association, trust company, savings bank, industrial bank
(or any similar depository institution which the Board of Directors
finds to be operating substantially in the same manner as an industrial
bank) or other banking institution which -- (A) is engaged in the
business of receiving deposits, other than trust funds . . . and
(B) is incorporated under the laws of any State or which is operating
under the Code of Law for the District of Columbia (except a national
bank)." 9
Similarly, the term "bank" as used in Section 36(g) includes
"trust companies, savings banks, or other such corporations or
institutions carrying on the banking business under the authority of
state law." 10
Consequently, the term "bank" as used in both Section 36(g) and
Section 1828(d)(4) includes ILCs.
State Restrictions on De Novo Branching by ILCs
As noted above, some states have enacted or proposed legislation
that prohibits an out-of-state ILC, but not other types of banks, from
establishing a de novo branch in their states. Viewing these state ILC
restrictions in light of the Host State Law Requirements, it is
apparent that, if enacted, these restrictions would cause a host
state's law to fail those requirements. If a state enacted these
restrictions, the state's de novo branching law would not apply
equally to all banks because the state's law would exclude one type of
bank, i.e., ILCs. Similarly, the state's de novo branching law would
not expressly permit all out-of-state banks to establish de novo
branches in such state because the state's law would not permit one
category of out-of-state banks (i.e., out-of-state ILCs, generally, or
in some state laws, Utah-chartered ILCs) to establish de novo branches
in such state.
Consequently, in our view, a state that enacted this type of de novo
branching restriction on ILCs would cause its interstate de novo
branching law to fail the Host State Law Requirements, and the
appropriate Federal banking agency would not be permitted to approve
the establishment of de novo branches in that state by any out-of-state
bank. This
{{8-31-06 p.4984.123}}determination, however, does not affect
the validity of any interstate de novo branches approved under Section
36(g), Section 1828(d)(4) or section 9 of the Federal Reserve Act prior
to the enactment of such restrictions.
Another type of state law permits all out-of-state banks to
establish de novo branches in the host state, but prohibits an
out-of-state ILC (but not other types of banks) from establishing a
branch on the premises of a commercial affiliate of the
ILC. 11
This type of state law does not apply equally to all banks and
therefore fails the Host State Law Requirements. If, however, the state
law expressly permits all out-of-state banks to establish de novo
branches in the state, but also provides that neither banks chartered
in the state nor out-of-state banks may establish or maintain a branch
in the state on the premises of a commercial
affiliate, 12
the state law would apply equally to all banks and would appear to
comply with the Host State Law Requirements. While this latter type of
law does impose a "locational limitation" on where any bank
(whether an out-of-state bank or an in-state bank) may establish a
branch within the state, this limitation does not treat any class of
banks differently than any other banks contrary to the requirements of
the Riegle Neal Act.
We hope this response addresses your concerns.
1 Pub. L. No. 103--328, 108 Stat. 2339 (1994). Go Back to Text
2 See id. § 103. Go Back to Text
3 Id. § 103(a), (b). Go Back to Text
4 See 12 U.S.C. § 321. Go Back to Text
5 Both Section 36(g) and Section 1828(d)(4) include
definitions of the terms "de novo branch," "home state,"
and "host state." See 12 U.S.C. §§ 36(g)(3)(A), (B)
and (C), 1828(d)(4)(C), (D) and (E). Go Back to Text
6 12 U.S.C. §§ 36(g)(1)(A), 1828(d)(4)(A)(i). Go Back to Text
7 Approval of such an application is also subject to certain
additional conditions and provisions dealing generally with host state
filing requirements, community reinvestment, and the adequacy of
capital and management. See U.S.C. §§ 36(g)(1)(B),
1828(d)(4)(B). Go Back to Text
8 See 12 U.S.C. § 1813(a)(1). Go Back to Text
9 12 U.S.C. § 1813(a)(2). Go Back to Text
10 12 U.S.C. § 36(l). Go Back to Text
11 See, e.g., VA CODE ANN., § 6.1--232.3
(2006). Go Back to Text
12 See, e.g., MD CODE ANN., FIN. INST.,
§§ 5--1003(a) and (b) (2006). Go Back to Text
[End FDIC Advisory Opinions]
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