[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