4000 - Advisory Opinions
Back Office Facilities Operated by Subsidiaries
January 26, 1999
Robert C. Fick, Counsel
You have asked whether "back office facilities" established and operated by an operating subsidiary of a State non-member bank outside of the bank's main office or branch locations would be considered "domestic branches" under the Federal Deposit Insurance Act (the "FDI Act," 12 U.S.C. § 1811 et seq.).
You indicated that the State non-member bank (the "Bank") currently operates back office facilities in Ohio and Georgia. The Bank now proposes to transfer those operations and the employees assigned to those operations to a wholly-owned subsidiary (the "Subsidiary"). The Bank proposes to enter into an appropriate servicing agreement with the Subsidiary pursuant to which the Subsidiary would provide certain loan origination services and loan servicing for various open-end and closed-end lending programs offered by the Bank.
In particular, the Subsidiary would engage in solicitation activities (e.g., mailing applications and prescreening), receipt of completed applications, and review and underwriting of such applications. After a loan has been booked by the Bank, the Subsidiary would provide servicing for the loan which may include posting debits and credits to the loan account, calculating interest charges and fees, and providing customer service. The Subsidiary may disburse loan proceeds (i.e., mail a check or electronically credit the proceeds to a merchant's or a dealer's account) on closed-end loans. The Subsidiary may also receive loan payments for processing to the loan accounts. These activities would be carried out (i) pursuant to guidelines established by the Bank, (ii) under the Bank's oversight, and (iii) generally on a non-discretionary basis. In addition, certain Subsidiary employees would have the authority to make discretionary decisions regarding loan approvals or concerning loan modifications. Such decisions would be consistent with the Bank's loan underwriting policies and procedures. Finally, you indicated that there would be no customer or public access to the Subsidiary's facilities.
Section 3(o) of the FDI Act provides, in pertinent part, that the term "domestic branch" includes "any branch bank, branch office, branch agency, additional office, or any branch place of business located in any State of the United States . . . at which deposits are received or checks paid or money lent."1 As noted in a previous letter to you regarding back office facilities,2 there are no published court decisions that provide a comprehensive interpretation of the term "domestic branch." However, the definition of "domestic branch" is, in relevant part, identical to the definition of "branch"3 in the National Bank Act, and there is substantial case law and agency guidance interpreting that term.
Relying upon that case law and consistent with interpretations of the National Bank Act's definition of "branch" by the Office of the Comptroller of the Currency, the FDIC has applied a three-prong test to determine whether a particular facility is a "domestic branch." First, the facility must receive deposits, pay checks, or lend money (these three activities are sometimes referred to as the "core banking functions").4 Second, the facility must be established by the bank, i.e., owned or rented by the bank.5 Third, the facility must provide the bank some advantage in its competition for customers; it must offer the bank's customers some convenience that gives the bank a competitive advantage over other banks.6
In this case, the Subsidiary's facilities would, among other things, receive payments on loans. Such an activity has been held to constitute receiving deposits.7 Consequently, the Subsidiary's facilities satisfy the first prong of the test.8
With regard to the establishment prong, you have indicated that this Subsidiary is wholly-owned by the Bank. Therefore, since the Subsidiary is owned by the Bank and subject to its control, it may be strongly argued that its facilities would constitute places established by the Bank. Therefore, the Subsidiary's facilities satisfy the second prong of the test.
The third prong is whether the Subsidiary's facilities would offer the Bank's customers some convenience that gives the Bank a competitive advantage over other banks. In this regard you stated that there would be no public access to the facilities and, specifically, no in-person contact with customers of the Bank at the Subsidiary's facilities. In particular, with respect to the receipt of loan payments, customers will mail their loan payments to the facility, and with respect to the disbursal of loan proceeds, the Subsidiary staff will mail the check or credit the amount to an account (usually the dealer's account in the case of a loan to purchase motor vehicle). All other Bank communications with customers and potential customers would be conducted by telephone or mail.
In view of the lack of any public access and the lack of any potential for in-person contact with customers at these facilities, we do not believe that such facilities would provide the Bank a competitive advantage over other banks in attracting customers. Customers would realize no special or extra convenience as a result of the location of these offices. Telephone communication and mail are methods of contacting customers that are available to all banks. From the customer's perspective there is no practical difference whether such facilities exist or not at a particular location. We conclude, therefore, that the Subsidiary's facilities described above would provide no competitive advantage to the Bank.9
Consequently, since the Subsidiary's facilities described above do not meet the third prong of the test for a branch, we conclude that such facilities, do not constitute "domestic branches" under section 3(o) of the FDI Act.
Please note that the opinions expressed herein represent the views of the Legal Division staff and, like all staff opinions, are not binding upon the FDIC or its Board of Directors. In addition, the opinions expressed herein are based upon the facts as presented. Any change in the facts or circumstances may result in different conclusions.
If you have any further questions regarding this issue, please contact me at your convenience.
2FDIC Unpub. Interp. Ltr., Subject: Back Office Facilities, From Robert C. Fick to (July 29, 1997). Go back to Text
312 U.S.C. § 36(j). Go back to Text
4See, Clarke v. Securities Industry Ass'n, 479 U.S. 388, 409 (1987), First Nat'l Bank in Plant City v. Dickinson, 396 U.S. 122, 135 (1969) ("Plant City"). Go back to Text
5See, Independent Bankers Ass'n of America v. Smith, 534 F.2d 921, 951 (D.C. Cir.), cert. denied, 429 U.S. 862 (1976); Independent Bankers Ass'n of New York v. Marine Midland Bank, 757 F.2d 453, 463 (2d Cir. 1985). Go back to Text
6See, Plant City, 396 U.S. at 135-37; Smith, 534 F.2d at 951. Go back to Text
7See, Smith, 534 F.2d at 940-41. Go back to Text
8Although the disbursal of loan proceeds raises an issue as to whether the facilities are also places where "money [is] lent" as that phrase is used in section 3(o) of the FDI Act, it is not necessary to resolve that issue. Since section 3(o) of the FDI Act lists the three core banking functions in the disjunctive, it is sufficient for purposes of determining that a facility satisfies the first prong of the test if the facility engages in only one of the listed core banking functions. See, Plant City, 396 U.S. at 135. In this case the receipt of deposits alone is sufficient to satisfy the first prong of the test. Go back to Text
9The Office of the Comptroller of the Currency has "long maintained that if the public does not have access to a bank-established facility, it is not a branch, even if core activities are involved." OCC Interp. Ltr. 634 (July 23, 1993). Go back to Text