| Subject: |
Establishment of Loan Production Offices (LPOs) in the Context of
the State Bank Branching Law and State EFT Act |
The Bureau has received inquiries asking whether the establishment and
operation of an LPO by a state-chartered bank would constitute the establishment
and operation of a branch within the meaning of Section 5(d) of the Banking
Code of 1969. The Comptroller of the Currency, the FDIC, and the Federal
Reserve have issued interpretive rulings or indicated informally that
the establishment and operation of an LPO does not constitute branch banking.
For example, the Federal Reserve Board, in August 1968, issued an interpretation
indicating the types of activities in which an LPO could engage without
such activities constituting the lending of money. The Board stated:
"The Board considers that the following, individually or collectively,
do not constitute the lending of money within the meaning of Section 5155
of the Revised Statutes: Soliciting loans on behalf of a bank (or a branch
thereof), assembling credit information, making property inspections and
appraisals, securing title information, preparing applications for loans
(including making recommendations with respect to action thereon), soliciting
investors to purchase loans from the bank, seeking to have such investors
contract with the bank for servicing of such loans, and other similar
agent-type activities. When loans are approved and funds disbursed solely
at the main office or a branch of the bank, an office at which only preliminary
and servicing steps are taken is not a place where "money (is) lent."
Because preliminary and servicing steps of the kinds described do not
constitute the performance of significant banking functions of the type
that Congress contemplated should be performed only at governmentally
approved offices, such office is accordingly not a branch." (12 CFR 250.141)
(brackets in the original)
The Bureau adopts this position subject to certain conditions. All of the
following activities would not constitute the lending of money or the acceptance
of deposits:
- Soliciting loans on behalf of the bank or a branch thereof. This could
involve buying loans or installment sales contracts or attracting loan
customers.
- Assembling credit information.
- Making property inspections and appraisals.
- Securing title information.
- Preparing or receiving applications for loans.
- Soliciting investors to purchase loans from the bank.
- Seeking to have loan purchasers contract with the bank for the servicing
of such loans.
- Informing customers or potential customers of the terms and conditions
of other services, including deposit accounts and trust accounts offered
by the bank.
- Referring customers to the main office, branch office or EFT facility
for more information or for obtaining needed services.
- Selling its investment securities (or an interest therein) under an
agreement to repurchase. Note: Buying investment securities under an
agreement to resell would be considered a loan and would not be permitted.
- Offering safe deposit services.
- Other similar agent-type or promotional activities.
An LPO could not engage in activities which constitute accepting deposits,
or paying checks or making loans including, but not restricted to, the following:
- Accepting funds for delivery to the main or a branch office at which
one or more deposit accounts are credited.
- Opening of deposit accounts.
- Paying checks or drafts.
- Honoring withdrawals or issuing checks or drafts which represent the
proceeds of loans or in any way, disbursing loan proceeds.
- Approving loans.
The question concerning the permissibility of LPOs has spawned a second
question - whether an off-premise EFT terminal* combined with an LPO would
constitute the establishment and operation of a branch within the meaning
of Section 5(d) of the
* Not a branch, under state law, if it is made available for sharing.
Banking Code. In view of the foregoing discussion on LPOs and of the
language of Section 5(d) exempting EFT terminals, it is clear that the
deployment of an LPO as definded herein or of an off-premise EFT terminal
is permitted. That is, neither activity, by itself, would constitute the
establishment and operation of a branch.
It is also clear that in the absence of the EFT Act and the companion
law which excludes a terminal which is made available for sharing from
the Banking Code definition of branch, an off-premise EFT terminal would
be a branch. However, with the passage of the EFT Act and the companion
act amending Section 5(d) of the Banking Code, a bank s off-premise EFT
terminal which is made available for sharing would fall outside of the
definition of branch.
Since an EFT terminal which is made available for sharing is not a branch,
and since an LPO as defined and limited herein is not a branch, it follows
that locating an EFT terminal at a place where activities permitted to
an LPO are performed, would not constitute the establishment and operation
of a branch. Thus, if a bank combines two unrelated and distinct services
and neither service, by itself, constitutes a branch, then such combination
of activities would not be a branch within the meaning of Section 5(d).
Banks should be advised that one or more EFT terminals used in conjunction
with an LPO would be subject to the sharing requirements for EFT terminals
set forth in Section 10 of Act No. 322 of the Public Acts of 1978. This
interpretation is based on Section 10(1) and (2) of the EFT Act which
states:
"Sec. 10(1) A financial institution may make available to its
customers 1 or more electronic funds transer terminals anywhere in this
state subject to this Section and Sections 12 to 28.
(2) The electronic funds transfer terminals may be made available
by the financial institution solely to its customers if the terminals
are located on the premises of its main office or approved branch. As
used in this subsection "approved branch" does not include electronic
funds transfer terminals located at a place where the financial institution
carries on no other substanital financial function for its customers."
It is clear that using one or more EFT terminals at the same place as an
LPO, confined to activities not involving accepting deposits, paying checks,
or making loans, would bring such terminal(s) within the sharing requirement
of Section 10(2). According to that Section, the only way that a bank which
deploys one or more EFT terminals can avoid the sharing requirement is by
locating the terminal(s) at its main office or at an "approved branch" where
"other substantial financial functions" are performed. Since an LPO clearly
is not an approved branch and the activities in which an LPO can engage
arguably do not constitute "other substantial financial functions," the
terminal(s) used in conjunction with an LPO must be shared. This sharing
requirement, however, only applies to the terminal and not the functions
performed by the LPO.
| Signed: |
Martha R. Seger, Ph.D., Commissioner |
| |
Gifford Knudsen, Director, Bank & Trust Division |
| |
|
| Dated: |
October 13, 1982 |
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