[Federal Register Volume 60, Number 66 (Thursday, April 6, 1995)]
[Rules and Regulations]
[Pages 17436-17438]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8404]



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FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Regulation H; Docket No. R-0873]


Membership of State Banking Institutions in the Federal Reserve 
System

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule; interpretation.

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SUMMARY: The Board is issuing an interpretation of the provisions of 
its Regulation H, Membership of State Banking Institutions in the 
Federal Reserve System, concerning the establishment of loan production 
offices and ``back office'' facilities by state member banks. The 
interpretation provides that a state member bank may establish a back 
office facility that is not accessible to the public without such a 
facility being considered to be a branch. The interpretation also 
provides that loans originated by a loan production office may be 
approved at a back office location, rather than at the main office or a 
branch of the bank, without the loan production office being considered 
to be a branch, if the proceeds of loans originated by the loan 
production office are received by customers at locations other than a 
loan production office or back office facility. This interpretation is 
intended to provide parity between state member banks and national 
banks with respect to the establishment of loan production offices and 
back office facilities.

EFFECTIVE DATE: April 6, 1995.

FOR FURTHER INFORMATION CONTACT: Lawranne Stewart, Senior Attorney 
(202/452-3513), Legal Division. For the hearing impaired only:, 
Telecommunications Device for the Deaf (``TDD''), Dorothea Thompson 
(202/452-3544).

SUPPLEMENTARY INFORMATION: In connection with the acquisition of a 
mortgage company by a state member bank, the Board has been asked to 
consider two issues with respect to the types of facilities that a 
state member bank may establish to engage in activities related to 
lending at locations that are not approved branches: (1) Whether a 
state member bank may establish a ``back office'' facility that is not 
accessible to the public without [[Page 17437]] such a facility being 
considered to be a branch of the bank; and (2) whether a loan 
production office will be considered to be a branch of the bank if it 
takes loan applications and performs related functions, but the loans 
are approved at locations other than an approved branch or main office 
of the bank. Under the Board's prior interpretation concerning loan 
production offices, published at 12 CFR 250.141, an office that engaged 
in loan origination activities was not considered to be a branch when 
the loans were approved and funds disbursed at the head office or a 
branch of the bank. ``Back office'' facilities that are not accessible 
to the public were not addressed in the prior interpretation.
    State member banks are subject to the same limitations on branching 
as national banks.\1\ Under the McFadden Act, national banks may 
establish branches only at locations at which a state bank would be 
permitted to establish a branch.\2\ Interpreting the branching 
restrictions of the McFadden Act, the Supreme Court has stated that the 
purpose of the McFadden Act was to maintain competitive equality 
between national and state banks, and that the determination as to 
whether a facility was a branch must be based on the convenience of the 
customer, rather than on the technical or legal relationship between 
the customer and the bank.\3\ In later cases addressing automated 
teller machines, the courts generally have rejected arguments that 
money is lent at the time and place where a loan or line of credit is 
approved, and instead found that money is lent for the purposes of the 
McFadden Act when the customer actually receives the funds and interest 
begins to run on the loan.\4\

    \1\Federal Reserve Act, section 9, paragraph 3 (12 U.S.C. 321); 
Regulation H, Sec. 208.9 (12 CFR 208.9).
    \2\12 U.S.C. 36(c). Under the McFadden Act, ``branch'' is 
defined to include ``any branch bank, branch office, branch agency, 
additional office, or any branch place of business . . . at which 
deposits are received, or checks are paid, or money lent.'' 12 
U.S.C. 36(f).
    \3\First National Bank of Plant City v. Dickinson, 396 U.S. 122 
(1969).
    \4\E.g., IBAA v. Smith, 534 F.2d 921 (D.C. Cir. 1976); Colorado 
ex rel. State Bank Brd. v. First Nat'l Bank, 540 F. 2d 497 (10th 
Cir. 1976); Illinois v. Continental Illinois NT&SA, 409 F. Supp. 
1167 (N.D. Ill. 1975), aff'd in relevant part, 536 F.2d 176 (7th 
Cir. 1976), cert. denied, 429 U.S. 871 (1976). Only one federal 
district court case stands in which the court concluded that a loan 
is made at the time that the bank and its customer reach agreement 
on the terms of the loan, and not at a location where only the 
proceeds of the loan are disbursed. See Oklahoma ex. rel. State 
Banking Board v. Utica Nat'l Bank and Trust, 409 F. Supp. 71 (N.D. 
Okla. 1975). This decision was criticized in each of the appellate 
court opinions that have addressed this issue.
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    The Board previously had determined that an office engaged in 
preliminary or servicing functions, such as soliciting loan 
applications and assembling credit information, is not lending money 
and therefore is not a ``branch'' for the purposes of the McFadden Act 
if the loans originated by the office are approved and the funds 
disbursed at the main office or an approved branch of the bank.\5\ 
Whether a loan production office should be considered to be a branch if 
loans originated by the office are approved at locations other than the 
main office or a branch of the bank therefore depends on whether the 
location where loan approval takes place enhances the convenience to 
the customer and therefore provides a competitive advantage to the 
bank.

    \5\12 CFR 250.141
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    Back office facilities that are not accessible to the public are 
not visited by customers and do not appear to provide customers of the 
bank with any greater level of convenience. From the point of view of a 
customer whose loan has been originated at a loan production office, 
there does not appear to be any difference in the convenience based on 
whether the loan is approved at the back office facility or at a branch 
of a bank, as it is unlikely that the customer will visit either 
location.
    Accordingly, the Board has concluded that, insofar as federal law 
is concerned, a state member bank may establish a back office facility 
without such a facility being considered to be a branch. The Board also 
has determined that loans originated by a loan production office may be 
approved at a back office location, rather than at the main office or a 
branch of the bank, without the loan production office being considered 
to be a branch under federal law, if the proceeds of loans originated 
by the loan production office are received by the customer at locations 
other than a loan production office or back office facility. This 
interpretation supersedes those portions of the Board's prior 
interpretation, published at 12 CFR 250.141, that concern loan 
production offices.

Administrative Procedures and Regulatory Flexibility Acts

    The provisions of the Administrative Procedures Act concerning 
notice and comment are not applicable to interpretative rules. 5 U.S.C. 
553(b). Because no notice of proposed rulemaking is required, a 
statement concerning the effects of the rule on small entities is also 
not required under the Regulatory Flexibility Act. 5 U.S.C. 604. The 
Board notes, however, that the interpretation provides greater 
flexibility to state member banks of all sizes in structuring their 
activities.

List of Subjects in 12 CFR Part 208

    Accounting, Agriculture, Banks, Banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

    For the reasons set forth in the preamble, 12 CFR part 208 is 
amended as set forth below:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 continues to read as 
follows:

    Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461, 
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105, 
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 781(b), 781(g), 
781(i), 78o-4(c)(5), 78q, 78q-1, and w; 31 U.S.C. 5318.

    2. In Subpart E, Sec. 208.123 is added in numerical order to read 
as follows:


Sec. 208.123  Loan production offices and ``back office'' facilities.

    (a) Scope. The Board has considered two issues:
    (1) Whether a state member bank may establish a ``back office'' 
facility that is not accessible to the public and is not visited by 
customers without such a facility being considered to be a branch of 
the bank; and
    (2) Whether a loan production office will be considered to be a 
branch of the bank if it takes loan applications and performs related 
functions, but the loans are approved at locations other than an 
approved branch or main office of the bank and funds are not disbursed 
at the loan production office.
    (b) Authority. State member banks are subject to the same 
limitations on branching as national banks. Federal Reserve Act, 
section 9, paragraph 3 (12 U.S.C. 321). Under the McFadden Act (44 
Stat. 1228), national banks may establish branches within a state only 
at locations at which a state bank would be permitted to establish a 
branch. 12 U.S.C. 36(c). For the purposes of the McFadden Act, 
``branch'' is defined to include ``any branch bank, branch office, 
branch agency, additional office, or any branch place of business * * * 
at which deposits are received, or checks are paid, or money lent.'' 12 
U.S.C. 36(f). Interpreting the branching restrictions of the McFadden 
Act, the Supreme Court has stated that the purpose of the McFadden Act 
was to [[Page 17438]] maintain competitive equality between national 
and state banks, and that the determination as to whether a facility 
was a branch must be based on the convenience of the customer, rather 
than on the technical or legal relationship between the customer and 
the bank. In later cases addressing automated teller machines, the 
courts generally have rejected arguments that money is lent at the time 
and place where a loan or line of credit is approved, and instead found 
that money is lent for the purposes of the McFadden Act when the 
customer actually receives the funds and interest begins to run on the 
loan. See, e.g., IBAA v. Smith, 534 F.2d 921 (D.C. Cir. 1976).
    (c) Interpretation. The Board previously had determined that an 
office engaged in preliminary or servicing functions is not lending 
money and therefore is not a ``branch'' for the purposes of the 
McFadden Act if the loans originated by the office are approved and the 
funds disbursed at the main office or an approved branch of the bank. 
See 12 CFR 250.141. Whether a loan production office should be 
considered to be a branch if loans originated by the office are 
approved at locations other than the main office or a branch of the 
bank depends on whether the location where loan approval takes place 
enhances the convenience to the customer and therefore provides a 
competitive advantage to the bank. Back office facilities that are not 
accessible to the public are not visited by customers and do not appear 
to provide customers of the bank with any greater level of convenience. 
From the point of view of a customer whose loan has been originated at 
a loan production office, there does not appear to be any difference in 
the convenience based on whether the loan is approved at the back 
office facility or at a branch of a bank, as it is unlikely that the 
customer will visit either location. Based on this analysis, the Board 
has concluded that a state member bank may establish a back office 
facility without such a facility being considered to be a branch for 
the purposes of the McFadden Act. The Board also has determined that 
loans originated by a loan production office may be approved at a back 
office location, rather than at the main office or a branch of the 
bank, without the loan production office being considered to be a 
branch, provided that the proceeds of loans originated by the loan 
production office are received by the customer at locations other than 
a loan production office or back office facility. This interpretation 
supersedes the Board's prior interpretation, published at 12 CFR 
250.141, as it applies to loan production offices.

    By order of the Board of Governors of the Federal Reserve 
System, March 31, 1995.
Barbara R. Lowrey,
Associate Secretary of the Board.
[FR Doc. 95-8404 Filed 4-5-95; 8:45 am]
BILLING CODE 6210-01-P