IBA Compliance Connection

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What activities can we conduct at a loan production office (LPO) to ensure that it is not considered a branch? Can we accept locked deposit bags at an LPO?

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For general guidance on branches in Illinois, we would refer you to the Illinois Banking Act’s definition of a “branch” and the interpretive letters issued by the IDFPR on loan production offices (LPOs) and deposit production offices (DPOs). The Illinois Banking Act defines a “branch” as a place where “deposits are received, checks paid, or loans made, but shall not include any place at which only records thereof are made, posted, or kept.” 205 ILCS 5/2. The definition explicitly excludes offices that are adjacent to and connected to the main bank, ATMs, point of sale terminals, and affiliate facilities.

(As the IDFPR stated in an interpretive letter, an office that does not fall into that “branch” definition would not be subject to the application and notice requirements for branches (in addition to other branching restrictions that have since been repealed). Interpretive Letter 91-21 (September 4, 1991). If you do not want an LPO or DPO to be considered a branch, employees cannot conduct any of the core banking activities — receiving deposits, paying checks, or making loans — at the office.)

Permissible DPO and LPO activities (which would not require a branch application) include:

  • Using a courier service established by a third party, provided that the courier service falls into the safe harbor established by an OCC rule (or if the facts and circumstances indicate that the service is not operating as a branch). Interpretive Letter 94-25 (December 1, 1994).
  • The safe harbor is found in 12 CFR 7.1012, and it applies where:

(i) A party other than the national bank owns or rents the messenger service and its facilities and employs the persons who provide the service;

(ii)

(A) The messenger service retains the discretion to determine in its own business judgment which customers and geographic areas it will serve; or

(B) If the messenger service and the bank are under common ownership or control, the messenger service actually provides its services to the general public, including other depository institutions, and retains the discretion to determine in its own business judgment which customers and geographic areas it will serve;

(iii) The messenger service maintains ultimate responsibility for scheduling, movement, and routing;

(iv) The messenger service does not operate under the name of the bank, and the bank and the messenger service do not advertise, or otherwise represent, that the bank itself is providing the service, although the bank may advertise that its customers may use one or more third party messenger services to transact business with the bank;

(v) The messenger service assumes responsibility for the items during transit and for maintaining adequate insurance covering thefts, employee fidelity, and other in-transit losses; and

(vi) The messenger service acts as the agent for the customer when the items are in transit. The bank deems items intended for deposit to be deposited when credited to the customer’s account at the bank’s main office, one of its branches, or another permissible facility, such as a back office facility that is not a branch. The bank deems items representing withdrawals to be paid when the items are given to the messenger service.

  • For guidance, you may want to look at OCC letter interpreting the safe harbor. While the OCC is not your primary federal regulator, the IDFPR has adopted the OCC rule, and the OCC’s interpretation of its rule is relevant (though it would not be binding on your regulator). In Interpretive Letter 843 (September 29, 1998), the OCC concluded that a DPO with a courier service was not a branch because, among other factors, the courier service was open to all members of the public, was independently operated, was not provided the bank or advertised as provided by the bank, and assumed responsibility for items during transit.

Impermissible DPO and LPO activities (which would require a branch application) include:

  • As stated in the 1988 letter, this position is supported by the U.S. Supreme Court’s holding that “at the time a customer delivers a sum of money either to the armored truck or the stationary receptacle [owned by the bank], the bank has, for all purposes contemplated by Congress in § 36 (f), received a deposit.” First Nat. Bank in Plant City v. Dickinson, 396 U.S. 122, 137 (1969). The Supreme Court reached that conclusion even though the deposits were not credited until delivered to the bank and even though the customer’s contracted stated that the messenger service was the agent of the customer and not of the bank.

We also note that the IDFPR almost always recommends that banks ask their primary federal regulators for an interpretation of the branch definition before establishing a new DPO or LPO.