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4000 - Advisory Opinions
Insured State Nonmember Banks May Enter Into Contract Branching
Agreements With Other Banks Located Within Same State Without Prior
FDIC Approval
FDIC--93--57
August 12, 1993
Alfred J. T. Byrne, General Counsel
This is in response to your April 29, 1993 inquiry whether
affiliated insured state nonmember banks may provide certain services
to one another's customers pursuant to a recently enacted Minnesota
statute, without filing branch applications with the Federal Deposit
Insurance Corporation ("FDIC") and receiving the FDIC's prior
written consent.
The FDIC has received numerous inquiries from insured state
nonmember banks concerning such arrangements whereby banks (affiliated
or nonaffiliated) within the same state agree to provide certain
banking services to one another's customers.
Generally, the banks involved enter into a contract whereby each
bank agrees to act as agent for the other bank in providing
specifically enumerated banking services. Examples would include an
agent bank accepting deposits, cashing checks and receiving
loan
{{4-29-94 p.4794}}payments for customers of the other
bank. These arrangements commonly are referred to as "contract
branching," "accommodation branching" or "facility
banking."
The primary legal question such arrangements pose is whether the
agent bank providing the accommodation service ("service bank")
becomes a "domestic branch" of the customer's bank ("customer
bank") as that term is defined in section 3(o) of the Federal
Deposit Insurance Act ("FDI Act").
This question has been addressed previously in two published FDIC
Legal Division staff advisory opinions. FDIC 88-69 (October 28, 1988);
FDIC 91-34 (April 23, 1991). In both opinions, Legal Division staff
opined that a service bank would be considered a domestic branch of a
customer bank. Accordingly, the filing of a branch application pursuant
to section 303.2 of the FDIC's rules and regulations would be required.
In view of the substantial interest in this question and the FDIC's
desire to facilitate the provision of safe, sound and efficient banking
services to consumers and minimize the administrative burden on insured
state nonmember banks, the Legal Division decided to re-examine the
issue.
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 located in any State. . .at which deposits
are received or checks paid or money lent." The scope of this
definition is unclear and the definition has never been interpreted by
a court of competent jurisdiction.
However, section 36(f) of the National Bank Act ("NBA")
contains a definition of "branch" which is virtually identical to
section 3(o) of the FDI Act, and which has been interpreted by the
Supreme Court and several courts of
appeals. 1
First National Bank in Plant City v. Dickinson, 396 U.S. 122
(1969) ("Plant City"); 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)
("Marine").
In Smith, the court was presented with the question
whether an automated teller machine ("ATM") owned and operated by
a bank was a branch of that bank pursuant to section 36(f). The ATM in
question dispensed cash, accepted deposits and allowed customers to
transfer funds between accounts. The Office of the Comptroller of the
Currency ("OCC") had issued an interpretive ruling to the effect
that such ATM's were not branches under the NBA. Central to its
analysis, the OCC analogized the functions performed by the ATM to
banking-by-mail and banking-by-telephone.
The court rejected the analogy, because "in the case of a mailbox
or a telephone, no place or facility established (i.e., owned or
rented) by a bank is involved. Mailboxes and telephones are not
facilities supplied by banks for the added convenience of their
customers and designed to retain and attract patronage." Smith
at 941. This analysis formed the basis for the court's holding
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.
Id. at 951-952. (Emphasis added)
In Marine, the Second Circuit Court of Appeals was
presented with the same branching question that faced the Smith
court, except that the ATM in Marine was owned by a
grocery store. The bank had entered into an agreement with the store
which allowed its account holders to use the ATM to make deposits, cash
withdrawals, transfer funds between accounts and obtain account balance
information. Each time a bank customer
{{4-29-94 p.4795}}used the ATM, the bank would pay a
transaction fee to the grocery store. Early in its decision, the court
in Marine quoted with approval the Smith test.
The court discussed in some detail the legislative history of
section 36(f), the need for the court to apply a measure of common
sense, and the well-recognized rule of giving appropriate deference to
the executive agency charged with a statute's enforcement when
attempting to apply it to new technology or circumstances. It observed
that:
Congress in 1927 could not possibly have foreseen the current
revolution in banking practices. The McFadden Act pre-dated the
invention of computers as well as their application to banking through
electronic funds transfer systems. Banking is no longer confined to
physical transactions. A rigid application of the language of 1927 to
the new technology fails to confront the economic realities facing a
court, and leads to anomalous results.
Marine at 459. Explicitly adopting the Smith
test, the court held that the ATM in question was not a branch of
the bank because the bank neither owned nor rented it. Id.
at 463.
Both of the previously published FDIC Legal Division staff advisory
opinions, especially FDIC 91-34, expressed the opinion that Smith
was not controlling in cases involving contract branching
arrangements, because Smith (a) interpreted section 36(f) of
the NBA, not section 3(o) of the FDI Act, and (b) involved ATMs, not
brick and mortar branches. Upon further review and reflection, however,
the Legal Division believes the better view is that the Smith
test should be applied in the cases involving contract branching.
At a time when new banking services and products rapidly are being
developed, one of the FDIC's primary functions is to "[f]ashion
policies in response to events that were unforeseeable when the
legislation was written." Id. at
461. 2
We therefore conclude that insured state nonmember banks which 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 section 303.2 of the
FDIC's regulations. 3
Of course, insured state nonmember banks must comply with the state
statutes and regulations concerning
branching. 4
In the interest of safe and sound banking practices, the FDIC
expects any insured state nonmember bank which engages in contract
branching to enter into an arms-length written agreement with the other
bank(s) involved that adequately addresses the nature of the services
to be provided and the rights and responsibilities of each of the
parties.
Moreover, the Legal Division is of the opinion that the range of
permissible activities which can be offered by a service bank to
customers of other banks is limited to those activities which are
virtually identical to activities which can be conducted at an ATM or a
teller window of the customer bank. Thus, service banks may not
originate loans or issue letters of credit on behalf of the customer
bank. Your incoming inquiry represents that the activities permitted by
the Minnesota statute are limited to routine services such as accepting
deposits, paying withdrawals, issuing money orders, travelers' checks
or similar instruments, cashing checks, receiving loan payments and
disbursing loan proceeds.
Finally, I should also note that it is the Legal Division's opinion
that, for federal deposit insurance purposes, deposits made with a
service bank will be treated as deposits made
{{4-29-94 p.4796}}directly with the customer bank in the
event that either institution fails prior to the actual transfer of
funds.
I trust this letter is fully responsive to your inquiry. If you have
further questions, please to not hesitate to contact me or Alan J.
Kaplan (202-898-3734) or Jeffrey M. Kopchik (202-898-3872) of the Legal
Division.
1The operative phrase "at which deposits are received or
checks paid or money lent" was inserted in the Banking Act of 1935.
It is interesting to note that identical language was included in the
National Bank Act in 1927. The legislative history of the Banking Act
of 1935, however, gives no indication whether Congress consciously
intended to copy the National Bank Act language, but the timing and the
fact that the language is identical suggests that possibility. Go Back to Text
2To the extent that the FDIC Legal Division staff advisory
opinions 88-69 and 91-34 are inconsistent with the views expressed in
this letter, this letter shall control. Go Back to Text
3The Chief Counsel of the OCC recently issued an opinion letter
expressing a similar view that national banks which engage in contract
branching shall not be considered to be branches of the bank with which
they contract. See October 8, 1992 letter from William P.
Bowden, Jr., Chief Counsel. Moreover, the OCC also recently issued a
revised Interpretative Ruling applying the Smith test in
cases involving the use of messenger services by national banks.
See 12 C.F.R. 7.7490; 58 Fed. Reg. 4070 (January 13,
1993). Go Back to Text
4FDIC Legal Division staff advisory opinions 88-69 and 91-34,
as well as the OCC Chief Counsel's recent opinion, were prompted by
state statutes explicitly permitting contract branching and providing
that banks which enter into such arrangements are not establishing
additional branches and need not file branch applications with the
state banking department. Go Back to Text
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