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Banking Interpretations

Supervisory Procedure G 101

August 31, 2004

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Re: Outsourcing of Bank Human Resources and Payroll Functions

Dear Mr. [ ]:

Your letter of November 21, 2003 to Superintendent of Banks Taylor has been referred to me for reply. Let me begin by apologizing for the delay in responding to your letter. In part, this delay resulted from our need to review this matter with several of our supervisory divisions in the Department. As we understand it, [ ] is a company that leases employees to companies for the purposes of performing administrative duties in their Human Resources and Payroll Departments. You have inquired as to whether the Banking Law would prohibit a State-chartered bank from outsourcing the administrative duties of its Human Resources and Payroll departments to[ ].

To date, the Banking Department has not opined as to whether a State- chartered bank may outsource the administrative duties of its Human Resources and Payroll departments. The Department has permitted banking organizations to enter into contracts with third parties to provide certain services that the bank previously performed itself. For example, under Supervisory Policy G 101 banks are permitted to outsource automated data processing services, subject to the Superintendent's right to examine all records and material, use the equipment and interview employees of the independent service provider. The Department has also permitted banks to outsource loan underwriting, subject to the requirement that bank officers take final responsibility for approving the underwriting decisions.

Some guidance is provided in this area by referring to those activities deemed permissible for national banks. The OCC has opined, with respect to outsourcing the administrative functions of a bank's Human Resources and Payroll departments, that national banks may lease the services of its employees from a third party as long as the bank's board of directors continues to retain and exercise general supervision over the officers of the bank. Interpretive Letter No. 431, reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) 85,655 (November 5, 1987); 12 CFR §7.2010. See, also the "2003 Activities Permissible for a National Bank", published by the Office of the Comptroller of the Currency in March 2004.

Accordingly, we conclude that it is permissible under the Banking Law for a State-chartered bank to enter into an agreement whereby the bank would outsource the administrative duties of its Human Resources and Payroll departments to an independent service provider. The bank and the independent service provider entering into such an outsourcing agreement will be subject to certain conditions. First, the bank must provide the Banking Department with prior written notice of its intention to enter such an outsourcing agreement. Second, the bank's board of directors must continue to retain and exercise general supervision over the affairs of the bank. Third, the independent service provider must agree that the Superintendent has the right to examine all of its records and material, use the equipment and interview its employees. And fourth, the independent service provider must agree that it is bound by the limitations of Banking Law Section 36(10), with respect to confidential supervisory and examination material, and provide the Department with a description of how it will ensure the confidentiality of such material.

I trust the foregoing is responsive to your inquiry. Should you have any further questions please feel free to contact me at (212) 709-1649.

Sincerely yours,

Jay Kane 
Assistant Counsel

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