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F e d e r a l R e s e r v e Ba n k o f D a lla s



Circular No. 68-178
August 19,1968


To All Member Banks and Others Concerned
in the Eleventh Federal Reserve District:
There is enclosed for your information a copy of a press
release concerning interpretations adopted by the Board of
Governors of the Federal Reserve System regarding member
bank purchases of stock of operations subsidiaries and what
constitutes “money lent” for the purpose of section 5155 of the
Revised Statutes.
Yours very truly,
P. E. Coldwell

Enclosure (1)

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (





For immediate release.

August 14, 1968.

In interpretations of Federal banking laws issued today,
the Board of Governors of the Federal Reserve System decided that:

State banks that are members of the Federal Reserve

System, as well as national banks, may purchase for their own account
shares of corporations to perform, at locations at which the banks
are authorized to engage in business, functions that the banks are
empowered to perform directly.

State banks that are members of the Federal Reserve

System, as well as national banks, may establish and operate, at any
location in the United States, "loan production offices" that perform
only servicing activities of the type described in the interpretation.
Such offices may be established and operated by banks either
directly, or indirectly through wholly-owned subsidiary corporations.
The interpretations, determined following a reexamination
of Federal statutes, reversed positions taken by the Board in 1966
and 1967.

All members of the Board concurred in the new rulings

except Governors Robertson and Brimmer, who adhered to the prior
The text of the interpretation incorporating both rulings
is attachedj as is a statement by Governors Robertson and Brimmer.

Member Bank Purchase of Stock of Operations Subsidiaries

The Board of Governors has reexamined its position that the
so-called "stock-purchase prohibition" of section 5136 of the Revised
Statutes (12 U. S. Code § 24), which is made applicable to member State
banks by the 20th paragraph of section 9 of the Federal Reserve Act
(12 U. S. Code § 335), forbids the purchase by a member bank "for its
own account of any shares of stock of any corporation" (the statutory
language), except as specifically permitted by provisions of Federal
law or as comprised within the concept of "such incidental powers as
shall be necessary to carry on the business of banking", referred to
in the first sentence of paragraph "Seventh" of R.S. 5136.
In 1966 the Board expressed the view that said incidental
powers do not permit member banks to purchqse stock of "operations
subsidiaries" - that is, organizations designed to serve, in effect,
as separately-incorporated departments of the bank, performing, at
locations at which the bank is authorized to engage in business,
functions that the bank is empowered to perform directly.

(See 1966

Federal Reserve Bulletin 1151.)
The Board now considers that the incidental powers clause
permits a bank to organize its operations in the manner that it believes
best facilitates the performance thereof.

One method of organization

is through departments; another is through separate incorporation of
particular operations.

In other words, a wholly-owned subsidiary

corporation engaged in activities that the bank itself may perform is
simply a convenient alternative organizational arrangement.


Reexamination of the apparent purposes and legislative history
of the stock-purchase prohibition referred to above has led the Board to
conclude that such prohibition should not be interpreted to preclude a
member bank from adopting such an organizational arrangement unless its
use would be inconsistent with other Federal law, either statutory or
In view of the relationship between the operation of certain
subsidiaries and the branch banking laws, the Board has also reexamined
its rulings on what constitutes ’money lent” for the purposes of sec­
tion 5155 of the Revised Statutes (12 U. S. Code § 36), which provides
that "The term 'branch'

. , . shall be held to include any branch bank,

branch office, branch agency, additional office, or any branch place of
business . . .

at which deposits are received, or checks paid, or money

The Board noted its 1967 interpretation that offices that are
open to the public and staffed by employees of the bank who regularly
engage in soliciting borrowers, negotiating terms, and processing appli­
cations for loans (so-called "loan production offices") constitute branches
(1967 Federal Reserve Bulletin 133^*)

The Board also noted that later in

that year it considered the question whether a bank holding company may
acquire the stock of a so-called "mortgage company" on the basis that the
company would be engaged in "furnishing services to or performing
services for such bank holding company or its banking subsidiaries"

1/ In the Board's judgment, the statutory enumeration of three specific
functions that establish branch status is not meant to be exclusive but
to assure that offices at which any of these functions is performed are
regarded as branches by the bank regulatory authorities.
In applying
the statute the emphasis should be to assure that significant banking
autRorizldaoffices ava^
^-a^^e to t^ public only at governmentally

(the so-called "servicing exemption" of section 4(c)(1)(C) of the Bank
Holding Company Act; 12 U. S. Code § 1843).

In concluding affirmatively,

the Board stated that "the appropriate test for determining whether the
company may be considered as within the servicing exemption is whether
the company will perform as principal any banking activities - such as
receiving deposits, paying checks, extending credit, conducting a trust
department, and the like.

In other words, if the mortgage company is to

act merely as an adjunct to a bank for the purpose of facilitating the
bank’s operations, the company may appropriately be considered as within
the scope of the servicing exemption."

(1967 Federal Reserve Bulletin 1911.)

The Board believes that the purposes of the branch banking laws
and the servicing exemption are related.

Generally, what constitutes a

branch does not constitute a servicing organization and, vice versa, an
office that only performs servicing functions should not be considered a

(See 1958 Federal Reserve Bulletin 431, last paragraph.)


viewed together, the above-cited interpretations on loan production
offices and mortgage companies represent a departure from this principle.
In reconsidering the laws involved, the Board has concluded that a test
similar to that adopted with respect to the servicing exemption under
the Bank Holding Company Act is appropriate for use in determining
whether or not "money [is] lent" at a particular office, for the purpose
of the Federal branch banking laws.
Accordingly, the Board considers that the following activities,
individually or collectively, do not constitute the lending of money

-4 -

within the meaning of section 5155 of the Revised Statutes:


loans on behalf of a bank (or a branch thereof), assembling credit in­
formation, making property inspections and appraisals, securing title
information, preparing applications for loans (including making recom­
mendations with respect to action thereon), soliciting investors to pur­
chase loans from the bank, seeking to have such investors contract with
the bank for the servicing of such loans, and other similar agent-type

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 con­
stitute 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.
To summarize the foregoing, the Board has concluded that,
insofar as Federal law is concerned, a member bank may purchase for its
own account shares of a corporation to perform, at locations at which the
bank is authorized to engage in business, functions that the bank is
empowered to perform directly.

Also, a member bank may establish and

operate, at any location in the United States, a "loan production office"
of the type described herein.

Such offices may be established and

operated by the bank either directly, or indirectly through a whollyowned subsidiary corporation.

-5 -

This interpretation supersedes both the Board's 1966 ruling
on "operations subsidiaries" and its 1967 ruling on "loan production
offices," referred to above.

Governors Robertson and Brimmer, in stating the reasons for
their dissent, said:
We are of the view that insofar as Federal laws are con­
cerned there should be no competitive inequality as between State banks
and national banks.
From the standpoint of Federal banking policy, we believe
that it would be in the public interest to amend the governing statutes
to give national banks and member State banks greater latitude to con­
duct some of their activities through subsidiary corporations.
However, the law being what it is, and the obligation of
the Federal Reserve being to administer that law (with respect to State
member banks) as it is--not as we might like to have it--we believe the
problem should have been resolved through legislation rather than by
changing our interpretation of the law.
To go even further, as the Board has done, and adopt the
position that State member banks may (through these subsidiaries)
establish loan production offices anywhere in the U. S., is to take
such a long step toward a fundamental change in our banking structure
as to call for legislative consideration--even if its legality were
unquestionable, which is not the case.

- 6 -

Congress, rather than bank supervisors, should decide
whether nationwide systems of loan production offices are to be
permitted in the U. S.--whether directly through specifically
approved branches or indirectly through offices of "operations sub­
sidiaries” (where no supervisory approval would be required under
this ruling).

There is a provision requiring that "loans must be

approved and funds disbursed solely at the bank's" main office or
branch, but this can be accomplished by telephone.

The establishment

throughout the country of loan production offices by the nation's
largest banks is not a possibility to be taken lightly.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102