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Federal R eserve Bank
OF DALLAS
R O B E R T D. M c T E E R , J R .
PR ESID EN T

D ALLAS, TEXAS

A N D C H IE F E X E C U T IV E O F F IC E R

75265-5906

April 25, 1995

Notice 95-41
TO:

The Chief Executive Officer of each state
m em ber bank and bank holding company
in the Eleventh Federal Reserve District

SUBJECT
Interpretation of Regulation H (Membership of
State Banking Institutions in the Federal Reserve System)
DETAILS

The Board of Governors of the Federal Reserve System issued an interpreta­
tion of Regulation H (Membership of State Banking Institutions in the Federal Reserve
System) relating to the establishment of loan production offices and “back office”
facilities of state mem ber banks.
The interpretation provides that a “back office” facility established by a state
m em ber bank is not considered a branch of the bank. In addition, the interpretation
states that loans originated by a loan production office of a bank may be approved as a
“back office” location—and not considered a branch—if the proceeds of the loan are
received by the customer at a location other than a loan production office or a “back
office” facility. This interpretation provides parity between state mem ber banks and
national banks in this respect.
ATTACHMENT

A copy of the Board’s notice as it appears on pages 17436-38, Vol. 60,
No. 66, of the Federal Register dated April 6, 1995, is attached.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

MORE INFORMATION

For more information, please contact Michael Johnson at (214) 922-6081.
For additional copies of this Bank’s notice, please contact the Public Affairs D epartm ent
at (214) 922-5254.
Sincerely yours,

FEDERAL RESERVE BANK OF DALLAS
NOTICE 95-41

Interpretation o f
Regulation H (Membership o f
State Banking Institutions
in the
Federal Reserve System)
Docket No. R-0873

17436

Federal Register / Vol. 60, No. 66 / Thursday, April 6, 1995 / Rules and Regulations

FEDERAL RESERVE SYSTEM
12CFR Part 208
[Regulation H; Docket No. R-0873]

Membership of State Banking
Institutions in the Federal Reserve
System

Board of Governors of the
Federal Reserve System.
ACTION: Final rule; interpretation.
AGENCY:

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.

SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Lawranne Stewart, Senior Attorney
(2 02 /45 2 -35 1 3 ), Legal Division. For the
hearing impaired only..
Telecommunications Device for the Deaf
(“TDD”), Dorothea Thompson (202/
4 52 -3 54 4 ).
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

Federal Register / Vol. 60, No. 66 / Thursday, April- 6, 1995 / Rules and Regulations
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 w hether 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, § 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 bu siness. . . at which deposits
are received, or checks are paid, or money lent.” 12
U.S.C. 36(f).
3 First N ational 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 N at’l
Bank, 540 F. 2d 497 (10th Cir. 1976); Illinois v.
Continental Illinois NTSrSA, 409 F. Supp. 1 167
(N.D. 111. 1975), a ffd 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 w hich
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
N at’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.

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.
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
5 12 CFR 250.141

17437

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, 37ld, 461, 481-486, 601, 611,
1814,1823(j), 1828(o), 18310,1831p-l, 3105,
3310, 3331-3351, and 3906-3909; 15 U.S.C.
78b, 781(b), 781{g), 781(i), 78o-4(c)(5), 78q,
78q-l, and w; 31 U.S.C. 5318.
2. In Subpart E, § 208.123 is added in
numerical order to read as follows:
§ 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 w ithout such a
facility being considered to be a branch
of the bank; and
(2) W hether 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

17438

Federal Register / Vol. 60, No. 66 / Thursday, April 6, 1995 / Rules and Regulations

maintain competitive equality between
national and state banks, and that the
determ ination as to w hether a facility
was a branch m ust 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 m achines, 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 w hen 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 determ ined that an
office engaged in prelim inary or
servicing functions is not lending
money and therefore is not a “branch”
for the purposes of the M cFadden 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 m ain office or
a branch of the bank depends on
w hether 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 custom er will
visit either location. Based on this
analysis, the Board has concluded that
a state member bank may establish a
back office facility w ithout such a
facility being considered to be a branch
for the purposes of the M cFadden Act.
The Board also has determ ined 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, w ithout 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.
B arbara R. Lowrey,

Associate Secretary of the Board.

[FR Doc. 95-8404 Filed 4-5-95; 8:45 am]
BILLING CODE 6210-01-P

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