Request By:
Mr. Vic Hellard, Jr., Director
Legislative Research Commission
State Capitol Building
Frankfort, Kentucky 40601
Opinion
Opinion By: Frederic J. Cowan, Attorney General; Everett C. Hoffman, Assistant Attorney General
RE: Automatic Teller Machines
The question you presented to us is whether it is legal for Kentucky's state chartered banks to operate automated teller machines, and to use other methods of electronic fund transfers.
As noted in your letter, the only mention of electronic fund transfers and automated teller machines in the Kentucky Revised Statutes relates to credit unions. See, KRS 290.055. There is no statute expressly authorizing or prohibiting the use of such devices by state-chartered banks. However, Kentucky's branching statute, KRS 287.180, places restrictions on where a state bank may exercise certain specified "powers necessary to carry on the the business of banking." With the exception provided in subsection (2) of the statute, a bank may exercise these necessary powers only at its principal office. The exception is that with the approval of the Department of Financial Institutions a bank may "establish" a branch office within the same county as its principal office. All of the "necessary powers" may be carried out at any properly approved branch office.
The "necessary powers" listed in KRS 287.180 are as follows: discounting and negotiating notes, drafts, bills or exchange and other evidences of debts; purchasing bonds; receiving deposits and allowing interest thereon; buying and selling exchange, coins, and bullion; and lending money on personal or real security. KRS 287.180 does not appear to restrict the power of a state bank to engage in transactions not specifically listed.
In November of 1975, the Kentucky Department of Financial Institutions cited the branching statute as its authority for a regulation governing the establishment of "remote service units" ("RSU"). See, 808 KAR 1:060. Section 2 of the regulation states that RSUs may be used for withdrawal of funds, instructing the bank to receive funds, and transferring funds for the customer's benefit. Although Section 13 states that an RSU is not a branch, Section 11 purports to place limitations on inter-county use of RSUs by financial institutions. No state bank may establish, share, or in any way participate in the use or operation of an RSU outside the county of its principal office, unless the RSU is so programmed that the only services available to out-of-county users is the dispensing of funds. Other sections of the regulation require prior approval by the Department before establishing an RSU, and impose a variety of reporting requirements.
One of the questions presented in your letter is whether the Department's regulation, insofar as it authorizes the establishment of RSUs, conflicts with the branching statute. Ordinarily, an administrative agency's interpretation of a statute that it has been charged with administering will not be overturned unless it is clearly erroneous.
Although there is no Kentucky caselaw interpreting the applicability of KRS 287.180 to RSUs, a 1927 Kentucky High Court decision does lend support to the notion that any location where a bank exercises purely ministerial, as distinguished from discretionary, functions should not be considered a branch. Marvin v. Kentucky Title Trust Company, 218 Ky. 135, 291 S.W.2d 17 (1927). In Marvin, the Court considered a bank's application to establish offices where deposits could be made, checks cashed, and records kept of the transactions. At that time, Kentucky caselaw prohibited branch banking altogether, and the banking commissioner had refused the application on that ground. The Court disagreed, stating that "the fact that these minor duties are carried on at more than one place in no wise affects the bank's solvency." 291 S.W.2d at 18.
In a 1983 opinion, this Office cited Marvin to support its conclusion that out-of-county "loan production offices," where information was given, applications were taken, but where no loan approval decisions were made, were not branch offices under KRS 287.180. OAG 83-471 (copy attached).
It is also useful to review the manner in which other state and federal courts have addressed this issue. On two different occasions the U.S. Comptroller of the Currency has determined that except under limited circumstances RSUs used by federally chartered banks are not branch offices within the meaning of the federal McFadden Act (and are, therefore, not subject to state branching restrictions). One of those determinations was overturned by the federal courts and one was upheld.
In Independent Bankers Association v. Smith, 534 F.2d 921, 938-950 (D.C. Cir.), cert. denied, 429 U.S. 862, 50 L. Ed. 2d 141, 97 S. Ct. 166 (1976), the Comptroller had ruled that RSUs are means of communication, not places where banks transact business. In reversing that decision, the U.S. Court of Appeals found that RSUs were, in fact, places of business "at which deposits are received, or checks paid, or money lent," and, therefore, were bank branches under the definition set out in the McFadden Act. See, 12 U.S.C. § 36(f). In so doing, the D.C. Circuit explicitly held the following:
1. Deposits received at RSUs are substantively no different from ordinary deposits. 534 F.2d at 938-40.
2. Transfers of funds into an account of the same customer and payments on installment loans or credit card accounts are also "deposits" within the meaning of the McFadden Act. 534 F.2d at 940-42.
3. Transfers and cash withdrawals out of a depository account constitute payment of checks within the meaning of the McFadden Act. 534 F.2d at 942.
4. Withdrawals on an open-end credit card or approved overdraft account constitute loaning money within the definition of the McFadden Act. 534 F.2d at 945-48.
The court, however, went to great lengths to emphasize that it was only deciding what constitutes a branch under federal law, not state law. 534 F.2d at 933-38.
In response to Smith, the Comptroller promulgated a new regulation stating that an RSU is only a branch within the meaning of the McFadden Act if it is "established (i.e owned or rented) by a national bank at a location separate from the main office" or other branch. 12 C.F.R. Sec 5.31 (1984). Thus, only an off-premises RSU will be considered a branch office and, furthermore, will only be considered a branch of the bank that owns or rents that particular location, not a branch of all the different banks whose customers use the RSU. Moreover, if the RSU is owned and operated by a business other than a national bank (by a grocery store, a shopping center, or gas station, for example) the RSU will not qualify as a branch of any bank. This regulation was upheld by the U.S. Court of Appeals for the Second Circuit, and, since 1985, has been valid federal law for the purposes of the McFadden Act. Independent Bankers Association v. Marine Midland Bank, 757 F.2d 453, 463 (2d Cir. 1985).
Because of this history, interpretations by states of their own branching statutes have also been in flux. Many states have decided, either by statute, regulation or court order, that RSUs utilized by state banks are not branches under state law, or are only branches under certain limited circumstances. See, Marine Midland, 757 F.2d at 461, n.4. The primary motivation for these positions appears to be preventing nationally-chartered banks from obtaining a competitive advantage over state chartered banks.
In sum, Kentucky law offers some support for the proposition that an RSU used by a state-chartered bank is not a branch office within the meaning of KRS 287.180. In light of similar interpretations in other states, the position taken by the Department does not appear to be clearly erroneous. Moreover, given present federal interpretations of the McFadden Act, there are strong policy reasons for reaching such a conclusion.
Although the Department has determined that RSUs are not branches, it has not determined that RSUs should go unregulated. As noted above, 808 KAR 1:060 places a variety of restrictions on RSUs, particularly on their inter-county use. Since RSUs are not branches, it is unclear under what statutory authority 808 KAR 1:060 was promulgated. In response to the comments at the end of your letter, it may be advisable to have the Department's authority in this area made explicit by new legislation.
Please contact this office if you should have additional questions.