STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5371

September 29, 1978

BANKS AND BANKING:

Branch Banks

A group of banks which reciprocally agree to permit customers to routinely and systematically make deposits and withdrawals at the offices of any of the participating banks are engaged in branch banking under present banking statutes.

Commencing on January 1, 1979, the effective date of 1978 PA 322 and 1978 PA 327, federal and state banks may participate in such activity provided that the provisions of the enabling statutes are fulfilled.

Keith Molin, Director

Michigan Department of Commerce

Law Building

Lansing, Michigan 48913

You have requested my opinion as to whether the banking service hereafter described violates Michigan's branch banking laws.

The service, which is referred to as 'consumer wire transfer of funds' ('CWT'), permits customers to transfer money from one financial institution to another through the use of the Michigan Automated Clearing House Association ('MACHA'). The transmitting institution accepts funds from or disburses funds to the customer and immediately notifies MACHA of the transaction. MACHA in turn transmits the information to the financial institution where the customer has an account which credits or debits the customer's account accordingly. The customer's institution then reconciles with the transmitting institution. All transactions require next day posting to the customer's account as the originating institution does not represent itself to be an agent of the customer's institution and, accordingly, will not post savings account transactions to the customer's passbook.

MACHA imposes a nominal fee on the transmitting bank which is sufficient to cover the cost for each transaction. However, there is no requirement that institutions charge their customers a fee for the transmission service. Each institution participating in the 'CWT' program must agree to provide the funds transfer service for customers of other participating institutions and, upon request, verify the amount on deposit in a customer's savings account, thereby guaranteeing reimbursement to the advancing or paying institution.

MACHA is a non-profit, non-stock, voluntary association comprised of state and nationally chartered banks, savings and loan associations, and credit unions. The association's bylaws provide that each member shall have one vote for every fifty million dollars in assets, thus larger financial institutions control the selection of directors and formulation of MACHA policy. This is evidenced by the fact that 70% of the bank votes are held by holding company subsidiaries which place 13 of the 20 bank representatives on the MACHA Board.

It is my opinion that based on the facts presented, the proposed 'CWT' program constitutes branch banking, as presently defined in the Michigan Banking Code, 1969 PA 319, MCLA 487.301 et seq; MSA 23.710(1) et seq, hereafter referred to as 'the Banking Code'. My conclusion is premised on the present statutory definition of a 'branch' and on the judicial interpretations which command that substance must prevail over form. However, as detailed infra, 1978 PA 322 and 1978 PA 327 authorize shared funds transfer facilities and amend the definition of the term 'branch' by specifically providing that such shared facilities are not branches. 1978 PA 322 and 1978 PA 327 are not effective until January 1, 1979. Therefore, my opinion is divided into two parts: Current Law and Law Effective January 1, 1979.

The statutory definition of a branch bank is found at section 5(d) of the Banking Code, which states:

A branch bank may only be established subject to the geographic limitation of 25 miles from the parent bank in the manner provided for in section 171 of the Banking Code. ⁽¹⁾

The 'CWT' service is distinguishable from the traditional wire transfer system in that the latter was not created, maintained, and used by a certain group of banks for the purpose of permitting those banks to systematically service customers located beyond 25 miles of the bank's main office. Moreover, unlike such utilities as the telephone, mail service, and armored car companies, the 'CWT' program is branch banking because it is not provided in a nondiscriminatory manner. It is limited to customers of those banks who belong to MACHA and who agree to offer the service for other bank customers. Additionally, such utilities are not established by or on behalf of a bank as part of the continuing mode of conducting banking business. Finally, the utilities provide no bank or group of banks with a competitive advantage over other banks. Thus, the 'CWT' system would not be branch banking if it were offered by the Federal Reserve or if it were presented to the public as being a bank service such as check cashing or fed wire transfer, which services are offered on a nondiscriminatory basis and without regard for unique reciprocal arrangements.

The landmark case in the field of branch banking is The First National Bank in Plant City v Dickinson, 396 US 122; 90 S Ct 337; 24 L Ed 2d 312 (1969). In Plant City, the court determined that a service offered by a bank which permitted commercial customers to effect deposits and withdrawals to their accounts through a controlled armored car pickup and delivery service and strategically placed unmanned stationary receptables constituted branch banking under 12 USC Sec. 36(f). ⁽²⁾ The high court provided the following construction of the term branch banking:

Similarly, the District of Columbia Circuit Court has recently analyzed the federal branching statute and has stated as follows:

Independent Bankers Ass'n of America v Smith, 534 F.2d 921, 931-32 (D.C. Cir. 1976) cert den 429 US 862 (1976)

(footnote omitted.)'

(emphasis in original)

The 'CWT' program is conceptually similar to the 'accommodation transaction service' ('ATS') created by the Michigan National Corporation to permit its customers to use the offices of any one of the approximately 200 Michigan National Corporation bank offices in Michigan as a place to deposit and withdraw funds in accounts located at other Michigan National Banks. ⁽³⁾ As a result of a suit brought by my office, the trial court has determined that the 'ATS' procedure constitutes branch banking. Accordingly, the Michigan National Corporation and its subsidiary banks have been enjoined from offering the service. ⁽⁴⁾ 'CWT' program was initiated in response to the decisions in the Michigan National litigation. In fact, it was conceived by and proposed to MACHA by the Michigan National Corporation. The effect of the 'CWT' program would be to allow the Michigan National banks to continue to offer 'ATS' under a new name. Their customers, who for the past four years have been conditioned into using 'ATS' as a convenient and systematic means of conducting their banking business, will find no difference in the 'CWT' system, except for the one day delay in account posting.

In determining whether an operation is branch banking, the courts have mandated that substance must prevail over form. In Plant City, supra, the bank attempted to defend its putative branching activity by requiring contracts with customers specifically providing that no deposits were received by the bank until physically delivered to the bank premises. The Supreme Court rejected the inchoate nature of the deposit, stating that:

396 US at 137; 90 S Ct at 345; 24 L Ed at 322

The fact that a deposit is received or withdrawal made by a third party on behalf of the bank does not insulate the bank from charges of illegal branch banking. In Jackson v First National Bank of Cornelia, 430 F2d 1200 (CA 5, 1970), cert den 401 US 947 (1971), the bank sought to avoid the Plant City result by divesting itself of the armored car operation. While recognizing that ownership of the branching vehicle might terminate the violation in its strictest form, the Court nonetheless found the activity to constitute illegal branch banking. Similarly, in Independent Bankers Association of America v Smith, supra, the Comptroller of the Currency argued that CBCT's ⁽⁵⁾ were not branch banks when manned by a third party non-employee of the bank, such as a merchant. The Court rejected this argument, stating:

534 F2d at 945

Also, OAG 1977-1978, No. 5155, p ___, (March 18, 1977), held that an insurance agent who was not an employee of a bank, but who by agreement with a bank solicits loans, prepares loan applications, and disburses loan proceeds, is acting as a branch facility of that bank.

Under the 'CWT' service, participating financial institutions become places at which a bank may receive deposits and effect withdrawals. Such institutions are at places geographically apart from the customer's bank and are linked together by reciprocal agreements, whereby they consent to act as depository banks only for customers of those institutions which agree to provide a similar service for their customers. Until January 1, 1979, section 5(d) of the Michigan Banking Code, and section 36(f) of the National Bank Act, define a branch to be any place apart from a bank's premises at which the bank receives deposits, pays checks and makes loans. Accordingly, a group of banks, affiliated or otherwise, which collaborate through the use of reciprocal agreements and an electronic device controlled by a group of identifiable and distinguishable banks to permit customers of any one of those banks to routinely and systematically make deposits and withdrawals at the offices of any of the other banks are engaged in branch banking.

Although the 'CWT' service does constitute branch banking under existing statutes, two newly enacted laws will permit banks to offer 'CWT' services commencing January 1, 1979. 1978 PA 322 authorizes financial institutions to establish electronic funds transfer terminals anywhere in Michigan. Its companion bill, 1978 PA 327 exempts shared electronic funds transfer facilities from the state branch bank definition by amending section 5(d) of the Banking Code of 1969, supra, to aid:

The term 'funds transfer facility' is defined at section 4(2) of 1978 PA 322 to mean 'an electronic funds transfer terminal or a funds transmission facility.' An electronic funds transfer terminal is defined at section 3(5) of 1978 PA 322 to mean:

The term 'funds transmission facility' is also defined in 1978 PA 322 at section 4(3) as:

The MACHA system you have described contemplates the use of computer tapes on which customer transactions are recorded and electronically transmitted to MACHA, at which time they are sorted and again electronically transmitted to the customer's bank of account. Although the terminals are manned by bank personnel, they are nonetheless information processing devices, as that term is used in the Act. Furthermore, such terminals are used for the purpose of executing transactions between financial institutions and their customers. As such, the MACHA system does not come within the exclusion set forth in section 6 of 1978 PA 322, which provides that the Act does not apply to terminals 'available for direct use only by financial institutions and not by the public generally.' This exception was intended to apply to electronic devices commonly and exclusively used by banks and other financial institutions to transmit financial information to other institutions or to computer and data processing centers. However, the 'CWT' system which you describe is not intended to permit only banks and other institutions to transfer funds and communicate information between themselves, but is intended to permit customers to communicate deposit account information to their institutions through a transmission facility provided by another institution for this express purpose. Accordingly, such a system is a funds transfer facility as defined in 1978 PA 322 and may be established under the terms set forth in this bill.

However, such operation is subject to all the limitations contained in the legislation, such as those which prohibit the transfer of funds between financial institutions [section 4(10)], the requirement that such facilities be shared in a non-discriminatory manner upon request by any financial institution and agreement by the financial institution to pay a reasonable fee [section 10(3)], as well as those sections dealing with the protection of the privacy and the limition of liability of customers [sections 12(1) and 14)].

In summary, therefore, it is my opinion that:

1. The 'CWT' program described in your letter constitutes branch banking under existing laws.

2. No state or national bank may presently offer their customers 'CWT' services unless such places where customers may make deposits and withdrawals to their accounts are approved by the appropriate regulatory agency as branches of the bank.

3. The 'CWT' program constitutes a funds transfer facility as defined in 1978 PA 322.

4. The 'CWT' program is not branch banking when the facilities are shared, as provided in 1978 PA 327, effective January 1, 1979.

5. Under the federal doctrine of competitive equality, First National Bank of Logan v Walker Bank and Trust Co, 385 US 252; 87 S Ct 492; 17 L Ed 2d 343 (1966), since state banks will not be engaged in illegal branching under state law commencing January 1, 1979, federal banks are not prohibited from engaging in the same activity.

6. State and national banks may offer the 'CWT' service to their customers commencing January 1, 1979, providing all conditions and provisions set forth in 1978 PA 322 are complied with.

Frank J. Kelley