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Banking Law
University of Connecticut School of Law
McCoy, Patricia A.

I.                  INTRODUCTION & OVERVIEW
a.    ENUMERATED POWERS:National banks are corporations so 12 USC §24 accordingly confers the sort of powers standard for all corporations (i.e., power to elect directors, appoint officers, adopt bylaws, issue stock, make contracts, sue and be sued, make charitable gifts, and remain in existence indefinitely).
                                           i.      Some Provisions Explicitly Provide Banks w/ Powers:
1.     §24 (Seventh): Authorizes Nat’l Banks To: Receive deposits; Discount and negotiate promissory notes and other evidence of debt (e.g., make unsecured loans); Make loans secured by personal property; Invest in high-quality debt securities; Broker securities for customers; and Deal in foreign exchange.
2.     § 371: Authorizes Nat’l Banks To:Make loans secured by real property
a.     §1464(c): authorizes all sorts of loans and investments—including a list of loans or investments that are acceptable w/out any limitations as a percentage of assets, (also, specifically mentions “mortgage-backed securities”). 
                                                                                                           i.      Breaks Down % of Assets Each Loan Type May Comprise:
1.     400% ³Real property as security
2.     20% ³Secured or unsecured
3.     10% ³Personal property—vehicles machinery
4.     5%³CRA stuff
5.      5% ³Residential real estate construction loans (on borrower’s credit) 
3.     §24 (Tenth): Authorizes Nat’l Banks To: Lease-finance personal property on “net lease basis.” Passed in 1987, this was a response to M&M Leasing (9th Cir. 1977).
4.     §92a: Authorizes Nat’l Banks To: Offer trust services
5.     §92: Authorizes Nat’l Banks To: Act as insurance agents in small towns
6.     §24 (Eleventh): Authorizes Nat’l Banks To: Make investments “designed primarily to promote the public welfare, including the welfare of low-and moderate-income communities or families.”
                                        ii.      Other Provisions Explicitly DENY Powers:
1.     Nat’l banks cannot own real property, § 29.
2.     Nat’l banks cannot own corporate stock or underwrite corporate securities, § 24 (Seventh); neither can state banks, §335, except when it comes to stock in the bank’s subsidiaries, §§ 24a, 335.
3.     Nat’l banks cannot underwrite insurance, 15 USC §6712(a).
4.     Nat’l banks cannot charge interest above the legal rate, 12 USC §85.
                                     iii.      When There is Ambiguity: Courts step in to figure out what’s going on, often with the help of the Comptroller’s interpretations. §24 (Seventh),as interpreted inNationsBank v. VALIC (US 1995)(“As the administrator charged with supervision of the Nat’l Bank Act, . . . the Comptroller bears primary responsibility for surveillance of ‘the business of banking’ authorized by §24[Seventh]”).   
                                           i.      § 24 (Seventh), the NBA’s Incidental Powers Clause: “a national banking association . . . shall have power to . . . (Seventh) exercise . . . all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion, by loaning money on personal security, and by . . . circulating notes.”
1.     Does §24 (Seventh) Confine or Liberate?
a.     Liberates: The list of powers has been interpreted as non-exhaustive.
                                                                                                         i.      NationsBank(important FN—“Business of banking is not limited to the enumerated powers. Exercise of discretion must be kept within reasonable bounds. Ventures distant from financial instruments may exceed those bounds”)
b.     Does § 24 (Seventh) Confine and, if so, to What Extent?
                                                                                                         i.      “Incidental powers . . . necessary to carry on the business of banking”
1.    Necessary: § 24 actually says “necessary;” the “convenient or useful” analysis was a product of judicial invention.
a.      ARNOLD TOURS, INC. v. CAMP (1st Cir. 1972)(“necessary,” or sine qua non, is not what the NBA intended. Challenged activity need only be “convenient or useful to carry on business of banking.” Doesn’t have to be indispensible to be upheld. ß current test).
                                                                                                                                                            i.      Note:Court was pretty well authorized to do this (see McCulloch v. Maryland, but perhaps it should not have set this analysis up given the differences between statutes and Constitutions—much easier for Congress to amend the former, hence less reason to do extra-textual work).
2.    Incidental: IF it’s incidental it’s because it’s of a financial nature.
a.       Arnold Tours (1st Cir. 1972) (The banks have a core expertise (Financial Activities) and travel services are not within it! IF it’s incidental it’s because it is of a financial nature) 
3.    Business of Banking: Suggests that it must be financial in some way. In other words, Banks cannot run farms, sell sweet corn, get into manufacturing, etc. McCoy.
a.      Arnold Tours (1st Cir. 1972)(The informational and agency services offered by nat’l banks normally, are germane to the financial operations of the bank in the exercise of its express powers). 
b.     Policy: We want banks to make lending decisions on an objective basis. Want to make sure money is used as efficiently as possible. Promotes expertise in one area. 
                                                                                                      ii.      The List of Powers: Under the last antecedent rule, it modifies the phrase “business of banking”(i.e., discounting and negotiating promissory notes drafts, bills of exchange, and other evidences of debt; receiving deposits; buying and selling exchange, coin, and bullion; loaning money on personal security, circulating notes)
1.    Canon of Construction: The list does defines the outer boundary of the “business of banking”; and, therefore, it constrains somewhat (new things should be like things listed). [in para meter?] a.       Arnold Tours (1st Cir. 1972)(the most reliable guides as to what is encompassed in the term “the business of banking” are the express powers of national banks as set out in the NBA).
2.     Definitions:
a.     “Discounting” is just another word for the time value of money.
b.     “Circulating Notes” means circulating dollar bills today—in 1864 it was much more complex. 
                                        ii.      SCOPE: Has been extended by Congress to: (1) FDIC-Insured State banks; (2) S&Ls [cite]; and (3) All other depository institutions [cite]. It also applies to subsidiaries purchased by national banks [cite].
1.     FDIC-Insured State Banks: FDIC-insured State bank may not “engage as principal in any type of activity that is not permissible for a national bank” unless the bank is adequately capitalized and the FDIC “has determined that the activity would pose no significant risk to the Deposit Insurance Fund.” 12 USC §1831a(a)(1).
2.     S&Ls: . . .
3.     Other Depository Institutions: . . .
4.     Subs Purchased by NAs: . . .
                                     iii.      What products can banks offer and what customers can they serve? 
William & Jacobson, in their article “The Business of Banking” have gleaned the following three factors to consider from the cases and interpretive letters available. (Williams was acting Comptroller when she wrote this, she’s the mastermind of the preemption doctrine from last class and the expansion of incidental powers). She proposes three alternative tests for what is the business of banking: 
1.     Whether the activity in question is functionally equivalent to, or a logical outgrowth of, a recognized bank power, (Williams & Jacobson, The Business of Banking);
a. Functional Equivalence Test: Developed by the 9th Circuit, this inquiry asks whether the challenged activity is “functionally equivalent to” some acceptable or traditional banking activity.
                                                                                                           i.      M&M Leasing (9TH Cir. 1977)(deciding that big-ticket leases and leases where full amount of investment is recovered are permissible under § 24 (Seventh) because they’re functionally equivalent to loans—a traditional banking activity). 
b. Similar to… Customer-Centric Approach: Asks what the challenged activity looks like from the customers’ perspective. If it looks like, or fulfills the same need as, something that is a traditional banking activity, then court will be more inclined to find it permissible under § 24 (Seventh).
                                                                                                           i.      NationsBank(finding that for customers, annuities are just like putting money in a savings account, a debt instrument, or a mutual fund—all familiar parts of the banking business, and that variable annuities are more sophisticated than standard savings account but is similar to it in that it fulfills the same customer need).
c.      Five basic functions are identified in the case law as touchstones for recognized banking activities; an activity should be presumed to be part of the business of banking if it corresponds to any of the following categories or functions, (Williams & Jacobson, The Business of Banking):

as long as reasonable. NationsBank. 
NationsBank(Court performed Chevron Analysis: 1) Has Congress spoken (can banks sell variable annuities as incidental power under §24)… NO. 2) Defer to OCC as long as reasonable. Comptroller gave a long explanation, it was decidedly reasonable, so Court deferred).
What is Unreasonable Under Chevron?
Operating a Travel Agency.
Ventures distant from dealing in financial investment instruments—i.e., operating a general travel agency. NationsBank, (US 1995).  
Furnishing computerized data processing services to third parties. 
National Retailers Corp. of Arizona v. Valley Nat’l Bank, 411 F. Supp. 308 (D. Ariz. 1976), aff’d (9th Cir. 1979) (invalidating OCC rule authorizing nat’l banks to furnish computerized data processing services to third parties, including automated analysis of merchants’ cash register receipts, citing Arnold Tours for proposition that the services went beyond producing information and reports useful in processing and considering loan applications at the bank).
OCC Deference: Post Chevron,what is okay according to OCC?
“Finder Activities” bring merchants together, in on-line context you can use hyperlinks to merchant sites, lending club (like Craig’s list), etc. Electronic retrieval of retailers online Catalog, hosting commercial website of retailers on the bank’s server, building retailer’s website, processing on-line payments (like credit), billing services, selling web design software and smart phones! OCC, Interpretive Letter No. 875 (Oct. 31, 1999)
                                      iv.      Arnold Tours, Inc. v. Camp (1st Cir. 1972):[CB: p. 109] Comptroller amended handbook, informally, to allow travel agency activity—no notice and comment period. Competitors sue. What were Ps worried about? Losing business, there were no ATMs then so it would have been easy for tellers to market their travel services. Profit margin in the travel industry was already slim, worried banks could easily pump a lot of capital into it.
ISSUE: Does §24(Seventh) allow travel agency services to be performed by National Banks?
NOTE: some narrow parts of travel agency business seem like classic banking activity—i.e., distributing foreign currency, sending money abroad, etc. BUT, most other stuff is clearly not banking related. 
HOLDING: §24 (Seventh) does not authorize national banks to set up travel departments. 
·         Standard of Review: Court Agreed that sine qua non was not the appropriate standard (“necessary” doesn’t mean “essential,” See McCulloch v. Maryland) BUT if you look at the District Court’s decision in its entirety, it becomes clear that the opinion was really more based on whether a travel agency primarily involves the performance of financial transactions pertaining to money or substitutes thereof. 
o   Financial Transactions: It was on this basis that the D.C. distinguished the travel agency business from such approved “incidental powers” of national banks as those employed in selling travelers’ checks or foreign currency, issuing letters of credit, or making travel loans.
·         Guideposts: The most reliable guides as to what is encompassed in the term “the business of banking” are the express powers of national banks as set out in the NBA. 
o   Test: A nat’l bank’s activity is authorized as an incidental power, “necessary to carry on the business of banking” within the meaning of §24 Seventh, if it is convenient or useful in connection with the performance of one of the bank’s established activities pursuant to its express powers under the NBA.
·         Granularity: The argument unrealistically minimizes the basic functions of a travel agency and unjustifiably exalts the agency and informational functions of nat’l banks. 
o   Some Circularity Here: The agency and informational services a bank travel agency renders are pursuant to its own interest in making a profit wholly apart from the bank’s normal banking operations.