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Banking Interpretations

NYBL 105(1); 240(2); 396(2)

March 29, 2010

Clifford S. Weber, Esq.
Hinman, Howard & Kattell, LLP
106 Corporate Park Drive - Suite 317
White Plains, NY 10604

Dear Mr. Weber:

This is in response to your letter to Deputy Superintendent and Counsel Marjorie Gross in which you inquired, on behalf of your national bank client, whether New York state-chartered commercial banks are permitted, under relevant New York Banking Law (“NYBL” or the “Banking Law”), to operate so-called “messenger service” branches, which are permitted for national banks pursuant to regulations promulgated by the Office of the Comptroller of the Currency (“OCC”) (12 C.F.R.§§ 7.1012 and 5.30).  You note in your letter that under the McFadden Act, as expressed in § 36(c)(2) of the National Bank Act (“NBA”) (12 U.S.C. §36(c)(2)) and interpreted by the federal courts, state law governs “….not only when and where a [national bank] branch may be established, but also the type and method of branching permitted.” 1

As envisioned by your client, the bank would operate vans as couriers within a defined geographic area of the bank’s traditional brick and mortar branches.  The vans would be staffed by bank employees, and, pursuant to written agreements, the bank’s commercial customers will deliver checks and other non-cash items to them, for delivery to the bank’s fixed branches, where they will be deposited for credit in the customers’ accounts. The bank will also disburse loan proceeds and conduct other lending activities from these vans. 2

Background on OCC definitions of “branch”; “messenger branch”

The NBA defines “branch” of a national bank to mean:

“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 lent.”

12 U.S.C.  §36(j).

The NBA also limits geographically where national banks may establish branches:

“A national banking association may…. establish and operate new branches: (1) within the limits of a city, town or village in which said association is situated, if such establishment and operation are at the time expressly authorized to State banks by the law of the State in question; and (2) at any point within the State in which said association is situated, if such establishment and operation are at the time authorized to State banks by the statute law of the State in question by language specifically granting such authority affirmatively and not merely by implication or recognition, and subject to the restrictions as to location imposed by the law of the State on State banks.” (italics added)

12 U.S.C. § 36(c).

Section 36(c) of the NBA was enacted as part of the McFadden Act of 1927 and was “deliberately settled upon [by Congress as] a policy intended to foster ‘competitive equality’ between national and state banks.”  First National Bank in Plant City v. Dickinson, Comptroller of Florida, 396 U.S. 122, at 131 (1969) (“Plant”), citing First National  Bank of Logan v. Walker Bank & Trust Co, 385 U.S. 252, at 261 (1966) (“Walker”).3

The OCC, in its regulations, also has authorized national banks to operate so-called “mobile” or “messenger service” branches.4  Specifically, 12 C.F.R. 7.1012 defines a “messenger service” as:

“any service, such as a courier service or armored car service, used by a national bank and its customers to pick up from, and deliver to, specific customers at locations such as their homes or offices, items relating to transactions between the bank and those customers.”

12 C.F.R. 7.1012 and related interpretations do not view “messenger services” as national bank branches if (i) the messenger services are established and operated by third parties; or (ii) if the messenger services are established and operated by the bank, but the service does not engage in branching functions within the meaning of 12 U.S.C. §36(j) (i.e. deposit-taking, check cashing, making loans).  The regulation and related interpretations set forth indicia to be used in determining whether a messenger service is a “third party messenger service”, and therefore does not constitute a branch of the bank which is subject to branching restrictions (e.g., a party other than the national bank owns or rents the service, employs the persons who provide the service and retains the discretion to determine the customers and geographic areas it will serve; the messenger service does not operate under the name of the bank; the messenger service acts as the agent for the customer while items are in transit and assumes responsibility for items in transit, etc.).

12 C.F.R. 7.1012 makes clear, however, that messenger services established and operated by national banks that engage in one or more branching functions are deemed “messenger service branches” and must receive branch approval from the OCC.

According to the Comptroller’s Licensing Manual, the operation of a messenger service branch or mobile branch is generally limited to those geographic locations in which the bank may permissibly operate a permanent branch, unless a state branching statute permits operation of these facilities in a broader area or limits these facilities to a smaller area.  A branch application (or an application to expand an already approved area) must delineate the proposed or expanded geographic area to be served by the facility.  Generally, as a condition to the operation of such a mobile branch, the OCC imposes the condition that the messenger service branch must maintain a log of operations, indicating the date, specific location, and description of each stop (e.g. “office, store, residence”).5

Federal Case Law Concerning the McFadden Act and National Bank Branching

The OCC’s clarification concerning the “branch” status of messenger service branches at which branching functions are carried out at mobile facilities operated by a national bank followed various court cases in which the OCC unsuccessfully argued that such facilities did not constitute branches.  In Plant, the leading Supreme Court case, the Court determined that a bank-owned and operated armored car messenger service that performed deposit pick-up and check cashing services for customers constituted branch banking by the national bank.  The first step in the Court’s analysis was to determine whether the activities in question constituted “branch” activities --- this is determined with reference to the definition of “branch” in the NBA (§ 36(j)).  An extended quote from the Court’s opinion is helpful:

“…the term ‘branch bank’ at the very least includes any place for receiving deposits or paying checks or lending money apart from the chartered premises; it may include more.  It should be emphasized that, since §36(f)6 is phrased in the disjunctive, the offering of any one of the three services mentioned in that definition will provide the basis for the finding that “branch” banking is taking place.  Thus, not only the taking of deposits but also the paying of checks or the lending of money could equally well provide the basis for such a finding.

First National and the Comptroller of the Currency urge that the challenged activity does not amount to branch banking under §36(f).  First National relies heavily, if indeed not entirely, upon carefully drawn contracts with its customers who use armored car or deposit receptacle services.  The bank urges that, “deposit”, being a word of art, the determination when a deposit is made is not a casual one inasmuch as that determination fixes important legal relationships of the parties.  The bank also urges that the creation of a deposit being purely a matter of intent, the issue is governed exclusively by the private contract… no “deposit” is actually received as such until monies delivered to the armored car or the receptacle are physically delivered into the hands of a bank teller at the chartered premises.  Until such time the bank may not, under the contracts, be held to account for the customer’s funds.

We have no difficulty accepting the bank’s argument that the debtor-creditor relationship is a creature of contract and that the parties can agree that until monies are physically delivered to the bank, no deposit will be credited to the customer’s account.  We are satisfied, however, that contracts have no significant purpose other than to remove the possibility that monies received will become “deposits” in the technical and legal sense until actually delivered to the chartered premises of a bank. We do not challenge the right of the contracting parties to fix rights and risks as between themselves;.... But while the contracting parties are free to arrange their private rights and liabilities as they see fit, it does not follow that private contractual arrangements, binding on the parties under state law, determine the meaning of the language or the reach of §36(f).

Because the purpose of the statute is to maintain competitive equality, it is relevant in construing “branch” to consider, not merely the contractual rights and liabilities created by the transaction, but all those aspects of the transaction that might give the bank an advantage in its competition for customers.  Unquestionably, a competitive advantage accrues to a bank that provides the service of receiving money for deposit at a place away from its main office….

We are satisfied that at the time a customer delivers a sum of money to the armored truck or stationary receptacle, the bank has, for all purposes contemplated by Congress in §36(f), received a deposit…. Since the putative deposits are in fact

“received” by a bank facility apart from its chartered place of business, we are compelled, in construing §36(f), to view the place of delivery of the customer’s cash and checks accompanied by a deposit slip as an “additional office, or… branch place of business… at which deposits are received.

(Id. 135-137) (emphasis added).

While the Supreme Court’s Plant decision concerned what is a branching activity, its Walker decision focused on where a branch may be located and relied on the McFadden Act’s “competitive equality” policy as codified in Section 36(c) of the NBA.  In particular, § 36(c) provides that a branch of a national bank may only be established when, where and how state law would authorize a state bank to establish and operate such a branch.7  The Walker Court explained the historical background against which the McFadden Act of 1927 was passed.  In the early 1920s, state bank branching was prevalent, and the Comptroller recommended stopping the further extension of state-wide branch banking, as he considered it a threat to the national banking system.  Various legislative proposals were put forward beginning around 1924, but the bill that eventually became the McFadden Act evidenced the intent of Congress to let the states determine the desirability of branch banking.  An early version of the bill would have permitted both national and state banks to establish “inside” branches within the municipality of their main banking facilities in those states that permitted branch banking at the time of the enactment of the bill.  The Senate struck the time limitation from the bill, however, thus permitting a subsequent change in state law to have a corresponding effect on the authority of national banks to engage in branching. Representative McFadden, the main sponsor of the bill, stressed the competitive equality purpose of the bill:

“As a result of the passage of this act, the national bank act has been so amended that national banks are able to meet the needs of modern industry and commerce and competitive equality has been established among all member banks of the Federal Reserve System” (Walker, at 258, citing 68 Cong. Rec. 5815 (1927) (emphasis added).

The Court in Walker further recounted how during the Great Depression, there was much agitation that bank failures were due to small undercapitalized rural banks and that these banks should be supplanted by branches of larger and stronger banks; therefore the OCC advocated that national banks be permitted to branch regardless of state law.  A Congressional proposal along these lines was strongly opposed and defeated. The Banking Act of 1933 finally amended section 36(c) of the NBA to permit national banks to branch only in those states where the State laws permit branching by state banks.  Senator Glass, the sponsor of the Act, clarified in a floor debate that it meant “only to the extent that State laws permit branch banking.” (Walker, at 259).  In Walker, therefore, the Court clarified that national banks were limited by Utah law not only concerning “whether” and “where” a branch may be located, but also the “method” of branching.  The outcomes of both Walker and Plant rely heavily on the underlying purpose of the McFadden Act as enunciated by the Court – a deliberate policy intended to foster “competitive equality.”

The same reasoning was employed two decades later by the United States Court of Appeals for the Second Circuit in Brown v. Clarke.  In that case, the Connecticut State Banking Commissioner objected to a messenger service operated by the First National Bank of Stamford (FNB) on the grounds that it constituted unauthorized branch banking.  FNB operated a messenger service to pick up deposits from its customers.  Pursuant to an agreement between FNB and the customer, the customer would appoint an FNB employee as his agent to collect funds and deliver them to a teller at FNB’s office in Stamford.  The agreement provided that the funds collected by the messenger were not considered received by the Bank until such deposits had actually been delivered by the messenger to the teller at the Bank’s premises. Relying on the reasoning in Plant, the Court found the messenger service to be a “branch” within the meaning of Section 36(f) of the NBA.  FNB had argued that, because the Connecticut statute authorized branch banking subject only to geographic limitations, its messenger service, if a branch under federal law, was permitted affirmatively by state statute. The Court rejected FNB’s argument, stating that the ambiguity arising from the statute’s lack of guidance regarding the method and manner in which state banks may branch is resolved in part by determining whether the interpretation urged by FNB would result in competitive inequality between state and national banks in Connecticut.  Connecticut’s Banking statutes, as interpreted by the Attorney General of Connecticut, prohibited branching through the use of messenger services of the type operated by FNB.  The Court found that Connecticut’s banking statute did not authorize “affirmatively and not merely by implication or recognition” state banks to operate messenger services like FNB’s, and that Section 36(c) of the NBA incorporates state law governing not only when and where a branch may be established but also the type and method of branching permitted.

Although each of these cases concerned whether a national bank could engage in a particular form of branch banking, the holdings make clear that the underlying issue in each case was not whether such method of branching was desirable as a policy matter, but whether such branching was permitted to state banks in the state in question – i.e. the goal of competitive equality between state and national banks was the only relevant question.

New York’s Branching Laws

Relevant New York Banking Law provides:

“No bank or trust company or officer, director, agent or employee thereof, shall transact any part of its usual business of banking at any place other than its principal office, except that a bank or trust company may open and occupy one or more branch offices at any location in the state, provided: (i) that the requirements of section 29 of [the Banking Law] are met….”

(NYBL section 105(1)).8

The purpose of this statute is to ensure that the banking business is transacted at an authorized location, either the principal office or a branch office.  Section 29 of the Banking Law sets forth the branch application statutory requirements and standards and provides, among other things, that in authorizing a branch location, the superintendent shall issue a certificate specifying the conditions under which the branch may be opened and the place where it shall be located.

While the terms “location” and “place” in these provisions may be open to interpretation, past Banking Department interpretations have held that each authorized branch location must be at a specific location.  For example, a 1968 Legal Division opinion held that “in each instance where banking institutions have requested approval of the use of mobile units or off-premises type of facilities to ‘transact any part of the usual business of banking’, the Department has considered the public need and convenience and has restricted the bank’s business to specific location[s] to allow for healthy competition and reasonable security.”  In that case, a bank had made a request to operate “guarded payroll mobile teller units” in the large office building of one of its prime customers in order to cash the company’s employees’ payroll checks.9 Likewise, the Department denied a bank’s request to send bank representatives to a local factory to distribute loan application forms and receive completed forms.10 The Department has issued several opinions permitting banks to enter arrangements with third-party messenger services to conduct banking activities such as deposit pick-up and check-cashing on the same terms as such messenger service operations have been permitted for national banks without being deemed a branch of the bank.  In addition, the Department has allowed banks themselves to operate mobile branches, but to date the Department has in these cases required the bank to designate each specific location at which the mobile branch will conduct activities, and to obtain separate branch approval for each such location.

While it may be argued that it is open to question whether New York’s branching laws require the conclusion that a branch must be confined to a specific location, what does not seem open to question is whether that New York’s law specifically… and not merely by implication or recognition… authorizes mobile branches to operate within a described geographic area.  In fact, the Banking Law does not expressly mention mobile branches at all.  This may in part explain the Banking Department’s position to date that mobile branches are permitted only if each separate stop is authorized as a branch location.11

OCC’s Mobile Branching Rules as Applied in New York

It is not entirely clear how the OCC would apply its mobile branching/messenger service branch regulations in New York, should a national bank request permission to operate a messenger service branch that served a general geographic area, without specifically identified stops.12  The OCC’s regulations at 12 C.F.R. 5.30(f)(2) provide that a national bank may request approval, through a single application, for multiple messenger services13 to serve the same geographic area.  The regulation provides that, unless otherwise required by law, the bank need not list the specific locations to be served.

Also, as noted above, the Comptroller’s Licensing Manual provides that the operation of a messenger service or mobile branch is generally limited to those geographic locations in which the bank may permissibly operate a permanent branch, unless a state branching statute permits operation of these facilities in a broader area or limits these facilities to a smaller area.  A branch application (or an application to expand an already approved area) must delineate the proposed or expanded geographic area to be served by the facility.  It is difficult to determine from the regulations and the Licensing Manual when the OCC might take the position that state law requires the listing of specific locations to be served as part of a mobile branch application.  It is also uncertain whether the OCC would permit a national bank to file a single application for a mobile branch application (even if it required the national bank to identify in the application the specific locations to be served), if the state, such as New York, would require separate branch applications for the locations of those stops.

Prior Examples of the OCC’s Application of its Mobile Branch Rules in States with Branching Laws Similar to New York’s

Some insight into the approach the OCC might adopt in New York might be gleaned from two corporate decisions dealing with mobile branching.  In Application by First Bethany Bank & Trust Company (Corporate Decision #99-41, December 1999), the OCC analyzed the permissibility of a proposal by First Bethany Bank & Trust Company to establish a mobile branch to provide branching services at six identified sites.  The OCC acknowledged that such application must be analyzed in the context of the statutory law of the state in question, and cited, among other relevant court cases, Brown v. Clarke.  Ultimately, the OCC viewed First Bethany’s proposal as more akin to an application to establish six fixed site branches, but indicated that, even if it viewed the application as a mobile branch application akin to the mobile van facility in the Brown case, it would view the mobile branch as permitted under Oklahoma statutes even though the Oklahoma statutes are silent on mobile branching:

“Nothing in the McFadden Act requires that the Comptroller construe a state law that is silent as to the establishment and operation of mobile branches as prohibiting mobile branches.  Indeed, it is quite reasonable for the Comptroller to construe a State law that permits branches to be established freely within a geographical area as permitting the establishment of a mobile branch that moves freely within that same geographical area and provides branching services at permissible branching locations.  Where a State’s legislature does not include a restriction in a branching statute, such a restriction should not ordinarily be read into the statute.”

(Corporate Decision #99-41, p.8).

This rationale appears to be in direct conflict with the holdings in Walker and Brown, which highlighted the requirement that a state’s law must authorize the method of branching “expressly and not merely by implication.”  However, earlier in the Bethany decision, the OCC noted that the agency has not necessarily taken the view that the Court in Brown properly interpreted Section 36 of the NBA. 

In another mobile branching decision involving Iowa branching statutes that are silent as to whether mobile branching facilities are permissible, the OCC again stated that “[I]n cases where state branching laws are silent on the issue of mobile facilities, but otherwise permit unlimited branching in a geographic area, the OCC has found that the establishment of a mobile branch is permissible.” (Corporate Decision #2002-3, February 2002).

The referenced corporate decisions suggest that the OCC might view New York’s branching laws, which are silent on mobile branching, as permitting mobile branches that move freely within a geographical area.

Conclusion

While prior OCC Corporate Decisions suggest that the OCC might interpret New York Banking Law to permit national banks to operate mobile branches freely within a defined geographic area, the Department does not reach the same conclusion, in light of (1) the Department’s past interpretations of NYBL 105 and (2) federal case law such as Walker and Brown which hold that national banks are bound as to the location, manner and method of branching by what state law permits state banks expressly, and not merely by implication.

Accordingly, since the Department does not believe that the Banking Law expressly permits New York state banks to operate messenger service branches freely throughout a geographic area as permitted under 12 C.F.R. 7.1012, we do not believe that national banks may branch in this manner in New York either.

I trust the foregoing is helpful..

Sincerely,

Rosanne Notaro
Deputy Counsel

CC:   Jonathan Rushdoony, Esq.
         District Counsel
         Office of the Comptroller of the Currency (Northeastern District Office)

_____________________

1 See, e.g., Brown v. Clarke 878 F. 2d 627, 632 (2nd Cir. 1989).  I note that the Banking Department also has received requests on behalf of New York state banks requesting that the Department use the “wild card” statute to grant state banks permission to use messenger branches to the extent permitted for national banks.  However, we believe that your letter properly identified the relevant question in the analysis – namely – in order to determine whether national banks may engage in messenger branch banking in New York State, it must first be determined that the NYBL would permit this method of branching for New York state-chartered banks. If it does not,  it would appear to follow that this method of branching could not be engaged in by national banks in New York and, accordingly, the Department could not use the wild card power to grant New York banks this power.

2 The other requests received by the Department concerning messenger service branches did not necessarily involve the check cashing and lending activities, and in some cases envisioned deposit-taking from retail, as well as commercial customers, but the analysis should be the same whether one or more such core banking activities would be performed by the bank-operated vans.

3 See discussion infra, expanding upon the policy of competitive equality underlying the McFadden Act.

4 As far as I am able to determine, it appears that a “messenger service branch” is a category of a mobile branch.  12 C.F.R. 5.30(d)(4) states that a “mobile branch” is a “branch, other than a messenger service branch, that does not have a single, permanent site, and includes a vehicle that travels to various public locations to enable customers to conduct their banking business.  A mobile branch may provide services at various regularly scheduled locations or it may be open at irregular times and locations such as county fairs, sporting events, or school registration periods.  A branch license is needed for each mobile unit.

The Comptroller’s Licensing Manual repeats the same definition for a “mobile branch”, except that it states that a “mobile branch” is a “facility, other than a messenger service…”  Since a “messenger service branch”, as defined in the OCC’s regulations at 7.1012(d) appears to meet the definition of a mobile branch, it appears that 12 C.F.R. 5.30(d)(4) would be more accurate if it was worded as in the Licensing Manual (i.e. exempting 3rd party “messenger services” from the definition of “mobile branch”, rather than exempting “messenger service branches”, which the OCC recognizes as a form of mobile branch (italics added for emphasis)

5 See, e.g., OCC Corporate Decision #97-21 (April 1997).

6 Note that at the time of the Plant opinion, the definition of “branch” in the NBA was codified at section 36(f)of the NBA rather than
  36(j), as it currently is.

7 In Walker, the OCC’s decision to permit First National to branch within the State of Utah was challenged on the ground that
  Utah’s statute did not expressly permit such branching to state banks.

8 NYBL Sections 240(2) and 396(2) are worded similarly, with respect to savings banks and savings and loan associations,
   respectively.

9 See, Legal Division memorandum dated May 1, 1968 from Assistant Counsel Sinclair to Deputy Billington.

10See, Legal Division memorandum dated May 11, 1972 from Associate Attorney Shanbron to Examiner Cohen.

11It should be noted that certain instances in which “banking” activities are conducted away from authorized bank office locations have been deemed permissible for various reasons.  For example, both the NYBL and the NBA expressly exempt automated teller machines (“ATMs”), which disburse funds and in some cases accept deposits, from the definition of “branch” (See NYBL 105-a, 240-a, 396-a, and 12 U.S.C. 36(j)).  12 U.S.C. 36(j) also expressly exempts remote service units (“RSUs”) from the definition of “branch”.  12 C.F.R. 7.4003 defines an RSU as an automated facility, operated by a customer of a bank, that conducts banking functions, such as receiving deposits, paying withdrawals, or lending money.  These facilities are “automated” in the sense that they are operated by the customer rather than a bank employee and can be used by the customer to effect a bank transaction without the involvement of bank personnel.

12The Department has been advised orally that the OCC may have already allowed one or more national banks to operate a mobile
   branch in New York State.

13Again, we believe the term “messenger service” in this context is being used broadly to include messenger service branches.

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