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Banking Interpretations

NYSBL 97(4-a)
Gen. Reg. Part 14

New York State Banking Department
Memorandum

To:        Senior Examiner Ed Dooley

From:    Alan M. Weinberg - Legal Division

Date:     January 22, 2007

Subject:   [---] (“[--]NA”) Part 14.3 Notice Re Investment in an Operating Subsidiary


Issue

Is [---]NA letter of January 9, 2007 concerning its investment in Equity Real Estate Solutions, LLC (“ERES”), a 50% owned indirect subsidiary of E-LOAN, Inc. (“E-Loan”)sufficient to meet the requirements of Part 14.3?

Recommendation

Yes, [---]NA letter is legally sufficient to meet the requirements of Part 14.3(a).

Background/Reasoning

[---]NA, a New York state-chartered bank and wholly-owned subsidiary of [---]("PNA"), sent the attached letter of January 9, 2007 to the New York Banking Department (the "Department") giving notice, pursuant to Part 14.3(a) that it intended, among other things, to make an investment in ERES, a 50% owned indirect subsidiary of E-Loan. E-Loan's shares are currently owned by another of PNA's wholly owned subsidiaries, [---]("PFH").

The transaction is contemplated to proceed as follows:

•  PFH will dividend its E-Loan shares to PNA.

•  PNA will then transfer the shares to [---]NA by way of a capital contribution. (Prior to the capital contribution, however, E-Loan will dividend all the shares of one of its wholly owned subsidiaries, E-Loan Insurance Services, Inc. ("EISI"), to its parent, PFH.)

•  Thus, as a result of the capital contribution, E-Loan and all its direct and indirect subsidiaries, other than EISI, will become operating subsidiaries of [---]NA. ([---]NA intends to file with the Department a separate after-the-fact notice pursuant to Part 14.3(c) for [---]NA’s intended investment in E-Loan and to seek Banking Board approval in the event it intends to acquire ownership of EISI.)

•  The current notice pursuant to Part 14.3(a) relates to ERES, a 50% owned indirect subsidiary of E-Loan, which engages in activities that do not qualify for after-the-fact notice pursuant to Part 14.3(c). ERES is a Pennsylvania limited liability company that is 50% owned by E-Loan's direct wholly owned subsidiary, Escrow Closing Services, Inc. ("ECS") and 50% owned by National Real Estate Information Services, L.P. ("NREIS"), a Pennsylvania limited partnership that is not affiliated with E-Loan.

ERES engages in insurance agency and insurance brokerage activities, specifically the operation of a title agency business, escrow operations, and arranging for appraisals. It holds insurance licenses in a number of states and its activities are permissible for an operating subsidiary of a New York state-chartered bank pursuant to New York State Banking Law Section 97(4-a) and 3 N.Y.C.R.R. Part 14.3. Its sole office and all of its records are located at 100 Beecham Drive, Pittsburgh, PA 15205. ERES is operated by managers, two spots being reserved for designees of ECS, E-Loan's direct wholly owned subsidiary, and two spots being reserved for designees of NREIS.

[---]NA will be making a less than majority equity investment in ERES, which is a limited liability company, and this raises questions about the applicability of Part 14. The procedures enumerated in Part14.3 speak to corporations of which a bank or trust company is or will become the owner of at least a majority of the voting stock and which are controlled by no other persons. As ERES is not a corporation but rather a limited liability company, Part 14 does not technically apply. Also, another area of concern is that [---]NA will not have a majority interest in ERES and, therefore, is not able to prevent the entity from engaging in activities impermissible for a bank.

By interpretation, however, the Department consistently has acknowledged that banks and trust companies may invest in subsidiaries that are in other than corporate form (e.g. LLC, partnership), and also that banks and trust companies may have less than majority ownership interests in operating subsidiaries. By "operating subsidiary", the Department means a subsidiary engaged in the transaction of business in which the bank or trust company could engage directly. In such situations -- i.e. involving a non-corporate entity or a less than majority ownership -- the Department's policy is to require the bank or trust company to file a Part 14 notice just as it would for majority-owned corporate subsidiary.

Also, when the investment is a less than majority interest, the Department requires the same commitments and satisfaction of the same conditions relating to the non-controlling investment as the OCC imposes on national banks making similar non-controlling investments in subsidiaries. These commitments and conditions may vary over time and, in their current form, are found in 12 CFR Part 5.36(e) which states:

Non-controlling investments. A national bank may make a non-controlling investment, directly or through its operating subsidiary, in an enterprise that engages in the activities described in paragraph (e)(2) of this section by filing a written notice. The written notice must be filed with the appropriate district office no later than 10 days after making the investment and must:

  1. Describe the structure of the investment and the activity or activities conducted by the enterprise in which the bank is investing. To the extent the notice relates to the initial affiliation of the bank with a company engaged in insurance activities, the bank should describe the type of insurance activity that the company is engaged in and has present plans to conduct. The bank must also list for each state the lines of business for which the company holds, or will hold, an insurance license, indicating the state where the company holds a resident license or charter, as applicable;
  2. State which paragraphs of Sec. 5.34(e)(5)(v) describe the activity or activities, or state that, and describe how, the activity is substantively the same as that contained in published acc precedent approving a non-controlling investment by a national bank or its operating subsidiary, state that the activity will be conducted in accordance with the same terms and conditions applicable to the activity covered by the precedent, and provide the citation to the applicable precedent;
  3. Certify that the bank is well managed and well capitalized at the time of the investment;
  4. Describe how the bank has the ability to prevent the enterprise from engaging in activities that are not set forth in Sec. 5.34(e)(5)(v) or not contained in published acc precedent approving a non-controlling investment by a national bank or its operating subsidiary, or how the bank otherwise has the ability to withdraw its investment;
  5. Certify that the bank will account for its investment under this section under the equity or cost method of accounting;
  6. Describe how the investment is convenient and useful to the bank in carrying out its business and not a mere passive investment unrelated to the bank's banking business;
  7. Certify that the bank's loss exposure is limited, as a legal and accounting matter, and the bank does not have open-ended liability for the obligations of the enterprise; and
  8. Certify that the enterprise in which the bank is investing agrees to be subject to OCC supervision and examination, subject to the limitations and requirements of section 45 of the Federal Deposit Insurance Act (12 U.S.C. 1831v) and section 115 of the Gramm-Leach-Bliley Act (12 U.S.C. 1820a).

In the letter of January 9, 2007 in connection with its investment in ERES, [---] NA certified that:

Thus, these certifications and the other matters covered in the letter seem to meet the OCC requirements, including the description found in 12 CFR Part 5.36(e)(4).  In the letter, [---]NA addressed how it will prevent the ERES from engaging in activities that are not permissible. The letter states, in part, that

ERES's LLC agreement will be amended prior to the Transfer to limit ERES' authorized activities to its current activities and to require ECS's consent for ERES to engage in new activities, E-Loan's loss exposure with respect to ERES is limited as a legal and accounting matter, [---]NA will not have open-ended liability for ERES's obligations and [---]NA's indirect investment in ERES will not be a mere passive investment and will be useful to [---]NA in carrying out its business as described below:

ERES is located in Pennsylvania, as stated above. You should note that nothing in the New York Banking Law (Section 97(4-a)), Part 14 or any interpretation of which I am aware places any geographical limitation on the permissible location of New York state bank or trust company operating subsidiaries, or on the application or reach of the Part 14 procedures.

[---]NA's notice letter of January 9, 2007 under Part 14.3(a) meets the requirements of that section because it contains the information required by that section.

Noted:_____
         RN

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