STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5668

March 14, 1980

SAVINGS AND LOAN ASSOCIATIONS:

Non-negotiable order for transfer of funds

BANKS AND BANKING:

Branch banks

Foreign banks

Payment of interest on checking accounts

Transfer of funds between accounts of depositor

State chartered savings and loan associations may permit withdrawals to be made by means of a non-negotiable order of transfer payable to a third party, including a bank, if prior approval of the Commissioner of the Financial Institutions Bureau is secured.

An agreement between a bank and a savings and loan association pursuant to which customers of the bank are able to make withdrawals from and deposits to the bank account in the offices of the savings and loan association does not amount to branch banking if services are offered pursuant to 1978 PA 322.

Absent appropriate rule by the Commissioner of the Financial Institutions Bureau, a bank which allows its customers to overdraw their checking accounts and cover such checks by the automatic transfer of funds from the customer's savings account is offering interest on checking accounts in violation of state law.

A foreign bank not authorized to do business in the State of Michigan which contracts with a Michigan savings and loan association whereby the association solicits accounts on behalf of the bank, assists customers in completing account application forms, submits them to the bank and acts as a place of business at which the customers may transact their banking business is unlawfully engaged in the business of banking in the State of Michigan.

William F. McLaughlin

Director

Michigan Department of Commerce

P. O. Box 30004

Lansing, Michigan 48909

You have requested my opinion on the legality of a service offered by several banks and state chartered savings and loan associations which permits funds to be transferred between a customer's savings account at the association and checking account at the bank. You advise that one such association has entered into an agreement with an out-of-state bank pursuant to which the association makes available a demand deposit account located at the bank to savings account customers of the associations. The service is widely marketed by the association, and the bank provides the association with all necessary information, forms, deposit contracts, and authority to secure relevant financial information from prospective customers.

In order to transact business with the bank, the customer need not visit any bank office. Deposits to and withdrawals from the checking account are accomplished by writing checks and maintaining a savings account at the association. When a check is presented for payment, funds sufficient to cover the check are transferred from the customer's savings account to checking account. Activity regarding each account is reported to the customer via periodic statements by the institutions involved. Any transfer request is made by the customer communicating directly to the association in writing, in person, by telephone, or by giving the bank prior authority to automatically transfer funds on behalf of the customer. An advantage of this service is that customers are able to maintain minimal amounts in a non-interest-bearing demand deposit account while maintaining deposits in a savings account located at the association.

Based on these facts, you request my opinion on the following questions:

1. In determining whether a savings and loan association may offer an interfinancial institutions funds transfer service, it is necessary to examine the statutory provisions governing the withdrawal procedures relative to state-chartered savings and loan associations. The Michigan Savings and Loan Act, 1964 PA 156, Sec. 325, MCLA 489.725; MSA 23.540(325), sets forth in detail the manner in which a depositor may withdraw funds from a savings and loan association account. In essence, the law permits a sepositor to present to the savings and loan association single requests for withdrawals at any time. The section further provides that a savings and loan association may not 'obligate itself to pay withdrawals on any plan other than as provided in this act.' This limitation, with respect to the withdrawal procedure, was modified by 1964 PA 156, Sec. 326, as added by 1971 PA 10, MCLA 489.726; MSA 23.540(326), which provides:

The transactions you describe clearly involve the 'transfer of funds from a savings account or savings deposit to third parties.' Moreover, you indicate that such transfers may only be made upon request of the depositor to the association either personally or by the bank acting on behalf of the customer. There is no indication that the transfer will be accomplished by way of a negotiable draft made payable to the bank. Accordingly, the transaction comes within the purview of 1964 PA 156, Sec. 326, supra, and is therefore a permissible practice for state chartered savings and loan associations.

It should be noted that a recent decision of the United States Court of Appeals ⁽¹⁾ prohibits such transactions by federally chartered savings and loan associations. In determining whether the Federal Reserve Board could by regulation authorize banks to automatically transfer funds from savings accounts to cover overdrawn checking accounts, and also whether the Federal Home Loan Bank Board could authorize facilitated withdrawals from accounts in savings and loan associations by use of off-premise automatic teller machines, the United States Court of Appeals held that such activities constitute withdrawals from a savings account 'by a device functionally equivalent to a check' and were therefore in violation of express prohibitions of such activities contained in federal law [12 USC, Sec. 371(a) and 12 USC Sec. 1464(b)(1)]. Since the Michigan Savings and Loan Act, supra, expressly permits third-party transfer orders by means of a non-negotiable order, United States League of Savings Associations v Board of Governors of the Federal Reserve System, supra, is inapplicable to state-chartered savings and loan associations.

Accordingly, it is my opinion that state-chartered savings and loan associations may allow withdrawals to be made by means of a non-negotiable order payable to a third party, including a bank, if prior approval of the Commissioner is secured.

2. The question whether a bank may enter into an agreement with another financial institution pursuant to which customers of the bank may transact their business at the offices of such other institutions depends on whether the offices of the other institution are places at which the bank conducts its business, and are consequently branches of that bank. The Michigan Banking Code of 1969, 1969 PA 319, Sec. 5(d), MCLA 487.305(d); MSA 23.710(5)(d), defines a branch bank as:

In OAG, 1977-1978, No. 5371, p ___ (September 29, 1978), the question whether a group of banks could enter into reciprocal agreements whereby customers of any one bank could use the offices of any other for the purpose of transacting banking business was considered. The opinion held that such agreements create places of business apart from the bank premises at which deposits are received and checks paid. Unlike routine telephone, wire transfer, or mail request transfers, the service 'is branch banking because it is not provided in a nondiscriminatory manner' but is instead limited to customers of those institutions which enter into the reciprocal arrangements. The opinion referred to was supported by a number of leading federal decisions which mandate that when determining whether branch banking exists, it is necessary to consider 'all those aspects of the transaction which might give the bank an advantage in its competition for customers.' The First National Bank in Plant City, Florida v Dickinson, 396 US 122; 90 S Ct 337; 24 L Ed 2d 312 (1969). The Supreme Court further concluded that such a determination must be based on an evaluation of the substance of the transaction involved and not be limited to the form or technicalities incident to the transaction. The opinion in OAG, 1977-1978, No. 5371, supra, was also premised on decisions recently rendered in a suit brought by my office in which it was determined that banks which agree to service each others customers are engaging in branch banking. ⁽²⁾

Based on a thorough evaluation of all of the information presented, including the facts that the service is limited only to those institutions which enter into the reciprocal agreements, no fee is charged for the service, supplied advertisements indicate that routine banking business may be conducted at the office of the savings and loan association, and it appearing that the service provides the bank with a competitive advantage over banks which cannot offer such a service, it is my opinion that the banks involved are engaged in branch banking.

It should be noted that OAG, 1977-1978, No. 5371, supra, recognizes the offering of reciprocal banking services by two or more financial institutions if performed pursuant to 1978 PA 322, MCLA 488.1 et seq; MSA 23.1137(1) et seq. Under that law, banks and other financial institutions may provide reciprocal services, such as deposits to and withdrawals from accounts, if the service involves the use of an electronic funds transfer terminal and a funds transfer facility. Section 5(d) of the Michigan Banking Code, 1969 PA 319, as amended by 1978 PA 327, MCLA 487.305(d); MSA 23.710(5)(d), expressly exempts from the definition of a branch bank 'an electronic funds transfer facility which is made available to 2 or more federal or state chartered financial institutions pursuant to a state statute which regulates electronic funds transfer facilities.' 1978 PA 322, supra, is such a state statute and requires, inter alia, that funds transfer facilities be made available to all financial institutions doing business in Michigan on reasonable and non-discriminatory terms and also requires that the institution offering such services provide safeguards to protect the privacy and security of customer accounts.

Therefore, it is my opinion that an agreement between a bank and savings and loan association pursuant to which customers of the bank are able to regularly and systematically make withdrawals from and deposits to the bank account at the offices of the savings and loan association does not amount to branch banking if such services are offered pursuant to 1978 PA 322, supra.

3. Although state chartered savings and loan associations may honor the non-negotiable orders of customers to transfer funds to third parties, a state chartered bank may not offer a service whereby the bank is authorized to automatically transfer funds from the customer's savings account to a checking account. Under the facts presented, a customer may execute a written authorization for the bank to draw upon the customer's savings account to pay an otherwise overdrawn check. Under this plan, customers may maintain virtually no funds in a non-interest-bearing checking account but are instead able to rely on funds maintained in an interest-paying savings account in order to pay such checks. Section 193 of the Michigan Banking Code of 1969, 1969 PA 319, Sec. 193, MCLA 487.493; MSA 23.710(193), provides that:

The program described clearly constitutes a device which permits the indirect payment of interest on demand deposit accounts. However, it must be noted that 1969 PA 319, Sec. 193, supra, permits such payments if nationally chartered banks are allowed to engage in similar activity and the Commissioner promulgates appropriate rules. Ironically, while federal law also prohibits indirect interest payments on demand deposit accounts, 12 USC Sec. 371(a), and the Federal Reserve Board rules authorizing transfers from savings to checking accounts [12 CFR Sec. 217.5(c)(2) and (3)] were declared invalid by the Court in United States League of Savings Associations v Board of Governors of the Federal Reserve System, supra, national banks are at this time permitted to offer such a service because the Court of Appeals' decision in United States League of Savings Associations v Board of Governors of the Federal Reserve System, supra, had been stayed until January 1, 1980. The Court granted this time in order to provide Congress with an opportunity to authorize such services by appropriate statutory amendments. Congress has acted within this time to pass legislation extending the authority to offer such services for a period ending March 30, 1980. 93 Stat 1233, ---- USC ----, P.L. 96-161, December 28, 1979. However, inasmuch as the Commissioner of the Financial Institutions Bureau has not promulgated rules, state-chartered banks may not offer a funds transfer service such as the type described in your question.

Accordingly, it is my opinion that a bank which allows customers to overdraw their checking accounts and cover such checks by the automatic transfer of funds from the customer's savings account to the checking account is, in effect, offering interest on checking accounts and, absent appropriate rules by the Commissioner of the Financial Institutions Bureau, is in violation of state law.

4. You have also advised that one of the banks contracting with the state chartered savings and loan association is located outside the State of Michigan. Under the agreement, the savings and loan association provides prospective bank customers with applications to open checking accounts and assists in completing all necessary forms and credit verification documents. The savings and loan association identifies the foreign bank in promoting the funds transfer service as a means of securing checking service at no cost.

In OAG, 1977-1978, No. 5088, p ___ (January 4, 1978), the question whether a foreign chartered credit union which solicited memberships in the State of Michigan through the mails was doing business in Michigan and, as such, subject to State licensing laws was considered and it was concluded that a company was doing business in Michigan if it engaged in a 'continuity of activity or systematic course of conduct in this state.' The agreement between the foreign bank and the state chartered savings and loan association and the bank's mode of operation leads me to conclude that the bank is doing business in the State of Michigan. In reaching this decision, it must be recognized that banks are quasi-public institutions whose business greatly concerns the people of this State. German Baptist Orphans' Home v Union Banking Co, 13 F Supp 814 (WD Mich, 1935). Furthermore, Section 2 of the Michigan Banking Code of 1969, 1969 PA 319, Sec. 2, MCLA 487.302; MSA 23.710(2), expresses the State's policy that the banking industry is to be supervised and regulated so as to insure the safe and sound conduct of such business, to maintain public confidence, and to protect the public interest. The unique nature of banking and the certain adverse economic effects would result from improvident supervision have also caused the courts to sanction regulation in the banking field which would not be permitted in other lines of commerce. In Commissioner of Banking v Berry, 27 Mich App 271, 306-307, 183 NW2d 436, 452 (1970), the Court enunciated this policy as follows:

It has also been a long established principle that foreign banks, chartered pursuant to foreign banking laws and subject to the scrutiny of foreign bank examiners, may not do business in Michigan even though such business may not include the receipt of deposits. In New York Mortgage Co v Secretary of State, 150 Mich 197, 202; 114 NW 82 (1907), the Court recognized that such activities by foreign banks '. . . would be repugnant to the policy of this State relative to such business, and would abolish as far as foreign corporations conducting such business within the State are concerned, every protection now guaranteed to the people of this State in dealing with domestic corporations of that character, and would give an unfair advantage to such foreign corporations over those organized within the State.'

While the foreign bank in question does not have offices in Michigan, it is conducting business in a systematic and regular course sufficient, in my opinion to conclude that the bank is doing business in Michigan. Such activity is contrary to the Michigan Banking Code of 1969, 1969 PA 319, Sec. 51, MCLA 487.351; MSA 23.710(51), which provides that '[n]o person may engage in the business of banking except an incorporated bank having its principal place of business located in this state . . .' In reaching this conclusion, I am also aware that the bank in question is insured by the Federal Deposit Insurance Corporation and is subject to competent and stringent regulation by a sister state. Such facts, however, are irrelevant since allowing the association to contract with this particular bank would also permit additional contracts with banks not so carefully regulated, regardless if such institutions are insured. Such action would be inimical to the public interest and will result in unnecessary risk to the savers of this State.

Therefore, it is my opinion that a foreign bank contracting with a Michigan savings and loan association whereby the association solicits accounts on behalf of the bank, assists customers in completing account application forms, submits customer information to the bank, and acts as a place of business at which customers may transact their banking business is illegally engaged in the business of banking in the State of Michigan.

In summary, it is my opinion that (1) state-chartered savings and loan associations may allow withdrawals to be made by means of a non-negotiable order payable to a third party, including a bank, if prior approval of the Commissioner is secured; (2) that an agreement between a bank and savings and loan association pursuant to which customers of the bank are able to regularly and systematically make withdrawals from and deposits to the bank account at the offices of the savings and loan association does not amount to branch banking if such services are offered pursuant to 1978 PA 322; (3) that a state-chartered bank which allows customers to overdraw their checking accounts and cover such checks by the automatic transfer of funds from the customer's savings account to the checking account is, in effect, offering interest on checking accounts and, absent appropriate rules by the Commissioner of the Financial Institutions Bureau, is in violation of state law; and (4) that a foreign bank contracting with a Michigan savings and loan association whereby the association solicits accounts on behalf of the bank, assists customers in completing account application forms, submits customer information to the bank, and acts as a place of business at which customers may transact their banking business is illegally engaged in the business of banking in the State of Michigan.

Frank J. Kelley