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FEDERAL RESERVE BANK
OF N EW YORK
r Circular No. 6 2 0 1 "1
L August 14, 1968 J

Interpretation by Board of Governors
To the State Member Banks in the
Second Federal Reserve District:

The following statement was made public today by the Board of Governors of the Federal
Reserve System:
In interpretations of Federal banking laws issued
today, the Board of Governors of the Federal Reserve
System decided that:
1. State banks that are members of the Federal
Reserve System, as well as national banks, may pur­
chase for their own account shares of corporations to
perform, at locations at which the banks are author­
ized to engage in business, functions that the banks
are empowered to perform directly.
2. State banks that are members of the Federal
Reserve System, as well as national banks, may estab­
lish 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 reex­
amination 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 in­
terpretations.
STATEM ENT B Y GOVERNORS ROBERTSON
AND BRIM M ER
Governors Robertson and Brimmer, in stating the
reasons for their dissent, said:
W e are of the view that insofar as Federal laws are
concerned 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 conduct some
of their activities through subsidiary corporations.
However, the law being what it is, and the obliga­
tion 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.
Congress, rather than bank supervisors, should de­
cide whether nationwide systems of loan production
offices are to be permitted in the U. S. — whether di­
rectly through specifically approved branches or in­
directly through offices of “ operations subsidiaries”
(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.

Printed below is the text of the interpretation. It will be published shortly in the Federal
Register and Federal R eserve Bulletin but is being sent to you now so that you may have prompt
notice of its content.
A

lfred

H

ayes,

President.
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 o f the Revised Statutes (12 U.S.C 24),
which is made applicable to member State banks by




the 20th paragraph of section 9 of the Federal
Act (12 U.S.C. 355), forbids the purchase bv a mom
ber bank “ for its own account of any shares o f stock
of any corporation” (the statutory language) except
( ovek)

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 para­
graph “ Seventh” of R.S. 5136.
In 1966 the Board expressed the view that said inci­
dental powers do not permit member banks to pur­
chase stock of “ operations subsidiaries” — that is, or­
ganizations designed to serve, in effect, as separatelyincorporated departments of the bank, performing, at
locations at which the bank is authorized to engage in
business, functions that the bank is empowered to per­
form 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 perform­
ance thereof. One method of organization is through
departments; another is through separate incorpora­
tion of particular operations. In other words, a
wholly-owned subsidiary corporation engaged in ac­
tivities that the bank itself may perform is simply a
convenient alternative organizational arrangement.
Reexamination of the apparent purposes and legis­
lative history of the stock-purchase prohibition re­
ferred 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 judicial.
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 con­
stitutes “ money lent” for the purposes of section 5155
of the Revised Statutes (12 U.S.C. 36), which provides
that “ the term ‘branch’ . . . shall be held to include
any branch bank, branch office, branch agency, addi­
tional office, or any branch place of business . . . at
which deposits are received, or checks paid, or money
lent.” 1
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 bor­
rowers, negotiating terms, and processing applications
for loans (so-called “ loan production offices” ) consti­
tute branches. (1967 Federal Reserve Bulletin 1134.)
The Board also noted that later in that year it con­
sidered the question whether a bank holding company
may acquire the stock of a so-called “ mortgage com­
pany” on the basis that the company would be en­
gaged in “ furnishing services to or performing ser­
vices for such bank holding company or its banking
subsidiaries” (the so-called “ servicing exemption” of
section 4 ( c ) ( 1 ) ( C ) of the Bank Holding Company
1 In the B o a rd ’ s judgm ent, the statutory enumeration o f
three specific functions that establish branch status is not
meant to be exclusive but to assure that offices at which any
o f these functions is perform ed are regarded as branches
b y the bank regulatory authorities. In applying the statute
the emphasis should be to assure that significant banking
fun ction s are made available to the public only at governmentally authorized offices.




A ct; 12 U.S.C. 1843). In concluding affirmatively, the
Board stated that “ the appropriate test for determin­
ing 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 exemp­
tion.” (1967 Federal Reserve Bulletin 1911.)
The Board believes that the purposes of the branch
banking laws and the servicing exemption are re­
lated. 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 branch. (See 1958 Federal Re­
serve Bulletin 431, last paragraph.) When viewed
together, the above-cited interpretations on loan pro­
duction 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 place, for the purpose
of the Federal branch banking laws. Accordingly,
the Board considers that the following activities, in­
dividually or collectively, do not constitute the lend­
ing 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 infor­
mation, making property inspections and appraisals,
securing title information, preparing applications for
loans (including making recommendations with re­
spect 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 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 pre­
liminary 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.
To summarize the foregoing, the Board has con­
cluded 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 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 wholly-owned subsidiary corporation.
This interpretation supersedes both the Board’s
1966 ruling on “ operations subsidiaries” and its 1967
ruling on ‘ ‘ loan production offices, ’ ’ referred to above.

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