Request By:
Representative James Bruce
Route 1
Hopkinsville, Kentucky 42240
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Penny R. Warren, Assistant Attorney General
You state the Committee on Banking and Insurance has been investigating "loan production offices" operated by the Bank of Louisville outside the county in which its principal office is located and ask whether these loan production offices constitute branch banks in violation of Kentucky banking laws. In our opinion the answer is no, based on the following analysis.
For assistance in responding to this question you attached materials collected by the Committee, including a September 15, 1983 statement by the Department of Banking and Securities, a 1978 ruling by the Federal Reserve Board, OAG 82-249, and two Mid America Financial Services advertisements which appear to have run in the Lexington area in January and June of this year. These documents reflect that the Federal Reserve Board has interpreted the term "branch" under 12 U.S.C. § 36 to exclude loan production offices as follows:
"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 preliminary and servicing steps of the kind 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." Rul. No. 250.141.
The Department of Banking and Securities' investigation of Bank of Louisville loan production offices revealed that these offices advise "customers on types of loan transactions available, interest rates, terms of payment and completion of loan applications and other necessary documentation." Information is electronically transmitted to the bank's principal office where the loan is approved or disapproved. For approved loans, necessary closing documents and authorization to distribute funds are electronically transmitted to the loan production office. The procedure is being modified so that a negotiable check will be transmitted electronically to the loan office. The Department concluded that these procedures do not violate Kentucky branch banking laws.
We are also aware that in 1971 the Comptroller of Currency interpreted 12 U.S.C. §§ 36 and 81 as follows:
"Origination of loans by employees or agents of a national bank or of a subsidiary corporation at locations other than the main office of the bank does not violate 12 U.S.C. §§ 36 and 81. Provided, That the loans are approved and made at the main office or a branch office of the bank or at an office of the subsidiary located on the premises of, or contiguous to, the main office or branch office of the bank." 12 C.F.R. § 7.7380(b) (1979).
The Department has interpreted Kentucky law to exclude unmanned remote service units from the requirements for a branch bank. 800 KAR 1:060. See also 23 A.L.R.3d 683, Annotation: "What is a 'branch bank' within statutes regulating the establishment of branch banks."
In
Marvin v. Kentucky Title Trust Company, 218 Ky. 135, 291 S.W. 17 (1927), the Court considered a combined bank and trust company's application to establish offices where deposits could be made, checks cashed, and records kept of the transactions. State law at that time prohibited branch banks, and the banking commissioner refused the application on the ground that the office would constitute a branch. The Court disagreed as follows:
"Banks are the depositories of most of the funds of the country, and the above decision [
Bruner v. Citizens' Bank of Shelbyville, 134 Ky. 283, 120 S.W. 345 (1909)] is based on the principle that they are quasi public institutions established and regulated by statute. The safety of the funds are carefully guarded, and this calls for the exercise of discretion and direct control upon the part of the directors and chief officers in the matter of loans, discounts, investments, and other like duties. . . . That opinion, howver, expressly recognizes the right of a bank to 'have as many duly appointed agents as its needs require, and these agents, among other things, may receive and forward to it at its place of business the money of persons who desire to deposit with it.'
In principle the same rule would apply to agents who merely receive deposits and pay out checks on demand, duties that are incidental to the business but which do not require special discretion and business acumen. * * * [T]he fact that these minor duties are carried on at more than one place in no wise affects the bank's solvency." Id. at 18.
In other words, banks may have agents performing ministerial functions outside the main office, but activities involving the exercise of discretion and business acumen may be performed only at the main office or at an approved branch under KRS 287.180.
Under the facts noted above and the foregoing authority, we conclude that the acts of the Bank of Louisville agents are ministerial or servicing in nature and do not violate Kentucky branch banking laws. This opinion is not intended to conflict with or be construed as limiting OAGs 82-249 and 69-180 in which loan approval and other discretionary functions were apparently occurring outside the main office or an approved branch.
You additionally request a legal opinion on the following three questions:
"1. May a bank make loans, have customers sign loan documents, and close loans at loan production offices located in counties outside a bank's home county?
"2. May a bank disburse funds at loan production offices located in counties outside a bank's home county?
"3. Is a negotiable check issued by electronic means from a bank to a loan production office located in a county outside a bank's home county considered to be disbursed at the bank or the loan production office?"
Assuming that by the words "make loans" you mean the exercise of discretion, the answer is no. In the second and third questions you have not defined the term "disburse, " and we note that the Department of Banking and Securities advised on September 15 that they were unable to find any definition of this term in any statute, interpretative ruling, or court decision. We believe, however, if a check were mailed from the bank's main office to the loan recipient, it would be clear that the "disbursal" occurred at the main office rather than the point of receipt. The activities of typing the check and envelope, affixing postage, depositing the envelope in a mail box, and delivery by the post office are merely ministerial functions and would not constitute "disbursal" of funds. Similarly, we would regard the use of more modern methods as electronic transmission merely to transfer a check or funds to the recipient's bank account or his home computer or to a loan office as ministerial activities which follow a home office decision to disburse the funds and use this particular method of transmission. Accordingly, we conclude the "disbursal" occurs at the home office under these facts.
Finally, we note that the January 1983 advertisement states "on the spot approval." The Department of Banking's investigation reveals that this claim does not reflect the actual point of approval. If you have information to the contrary, it should be forwarded to the commissioner of banking for appropriate action.
We hope that the foregoing discussion adequately responds to your questions and will be of assistance during the Committee deliberations.