Banks, Foreign Bank Agencies, and Trust Companies

GENERAL TOPICS

I.  Banking Operations and Activities

II.  Internet and Other Electronic Activities

III. Securities, Insurance, and Real Estate Activities

IV.  Fiduciary Operations and Activities

V.  Corporate Transactions and Powers

VI.  Legal Lending and Investment Limits

VII.  Banking, Fiduciary, and Corporate Powers of Other Institutions

SUBJECT LIST OF SELECTED LEGAL OPINIONS

I.  Banking Operations and Activities

II.  Internet and Other Electronic Activities

III.  Securities, Insurance, and Real Estate Activities

IV.  Fiduciary Operations and Activities

V.  Corporate Transactions and Powers

VI.  Legal Lending and Investment Limits

VII.  Banking, Fiduciary, and Corporate Powers of Other Institutions

Opinion No. 22-01

The Department does not view a customary one-time proxy solicitation to vote shares of a Texas state bank (or its bank holding company) as an acquisition subject to prior notice or approval of a change in control.

July 13, 2022

Everette D. Jobe, Senior Counsel

By letter received June 23, 2022, addressed to Catherine Reyer, General Counsel, you ask whether obtaining short-term, revocable proxies in connection with the election of directors from holders of 25% or more of the outstanding shares of voting stock of a corporation that owns a state bank would result in control of that corporation (or state bank) and require the prior approval of the Texas Banking Commissioner pursuant to Section 33.001 of the Texas Finance Code. I have been requested to respond to your inquiry. The following is intended to affirm our telephone conversation on July 12.

In general, our policy view regarding proxy solicitation and voting is similar to that held by the Federal Deposit Insurance Corporation, see 12 C.F.R. §303.83(a)(5), and the Board of Governors of the Federal Reserve System, see 12 C.F.R. §225.42(a)(5). The Department does not view a customary proxy solicitation to vote shares of a Texas state bank (or its bank holding company) as an acquisition subject to prior notice or approval under Subchapter A of Texas Finance Code Chapter 33 and 7 Tex. Admin. Code §15.81. To be clear, this policy is not limited to proxy solicitation by management and could also apply to a customary proxy solicitation by shareholders seeking to effect management changes at a specific annual meeting.

To be considered a customary proxy solicitation, the proxies sought must be for the purpose of conducting business at a designated regular or special meeting, must be revocable, and must terminate within a reasonable period after the meeting (subject to prior revocation). Further, the terms of the proxies and their solicitation must be consistent with customary business practices and not confer additional incidents of ownership.

Finally, facts may exist in a specific case that evidence additional aspects of control and counter the assumptions underlying application of this basic policy.

Opinion No. 17-01

An out-of-state trust company may not lawfully engage an individual in Texas to provide business development and marketing services in Texas without first complying with the requirements of Chapter 187, Finance Code, to establish a trust representative office. (See 7 TAC §21.44)

April 11, 2017

Everette D. Jobe, Senior Counsel

This letter is in response to your email of February 27, 2017, to Dan Frasier of the Texas Department of Banking ("Department"), in which you requested the Department of Banking to review a proposed marketing arrangement and provide an opinion as to whether such arrangement can be implemented as proposed in compliance with Texas law.

As more fully developed below, we are of the opinion that the proposed arrangement would constitute de facto establishment of a representative trust office in Texas subject to [7 TAC §21.44].

Facts: 

XYZ (the "Company"), is a Tennessee-chartered nondepository trust company with offices only in the State of Tennessee. The only types of accounts handled by the Company are trust, estate and foundation accounts, either as fiduciary or as agent for the fiduciary. For trust accounts, the Company acts only as a "directed trustee" that does not make investment decisions.

The Company is interested in engaging an individual in Texas on an independent contractor basis to provide business development for the Company in the Houston area. The individual would not be treated as an employee, but would be compensated on a commission basis under a contract that would include non-compete and non-solicitation provisions for a term not to exceed one year, cancellable by either party upon appropriate notice. The individual’s activities would include setting up and attending meetings with investment, tax and legal professionals (as potential referral sources), as well as prospective trust, estate, and foundation clients, to market the Company. The individual would assist in the setup of new accounts (such as gathering information and signatures from new clients) that have been accepted by the Company. The individual would also periodically communicate with Texas clients, primarily by phone and email, to facilitate the flow of information between the Company and the client(s).

All Texas clients accepted as a result of the individual’s marketing efforts would be assigned a trust officer in Tennessee. The individual would not be involved in any fiduciary activities or decisions of the Company, including account acceptance decisions and discretionary distribution decisions, which would all take place at the Company’s trust offices in Tennessee.

The individual’s home and office (if any) would not be represented as offices of the Company, no Company signage would be posted at such locations, the addresses of such locations would not be included on Company letterhead/correspondence or marketing materials, and the individual would not conduct meetings at such locations with clients or prospective clients.

Analysis:

In pertinent part, Section 187.002, Texas Finance Code, provides as follows:

(a) A company may not conduct a trust business in this state unless the company is a trust institution and is:
... (3) a trust company chartered under the laws of another state or a foreign country that has a trust office in this state licensed by the banking commissioner pursuant to this chapter....

(b) Notwithstanding Subsection (a), a trust institution that does not maintain a principal office, branch, or trust office in this state may act as a fiduciary in this state to the extent permitted by Subchapter A, Chapter 505, Estates Code.

(c) A company does not engage in the trust business in this state in a manner requiring a charter or license under this subtitle by engaging in an activity identified in Section 182.021, except that the registration requirements of Section 187.202 may apply to a trust representative office engaging in the activity.

Pursuant to Section 187.004, Finance Code, an out-of-state trust company that establishes a trust office in Texas pursuant to Subchapter B, Chapter 187, Finance Code, or a representative trust office in Texas pursuant to Subchapter C, Chapter 187, Finance Code, may serve as a fiduciary in Texas and conduct any activity at the office that would be authorized under the laws of this state for a state trust company to conduct at that type of office.

Subchapter A, Chapter 505, Estates Code, specifically Section 505.003, permits an out-of-state trust company that does not have an office in Texas to serve as a fiduciary for a Texas resident if the Texas resident by written instrument appoints the trust company as a fiduciary, but only if (1) the trust company does not directly or indirectly solicit the appointment, (2) the laws of the trust company’s home state would permit a Texas-chartered corporate fiduciary to be similarly appointed by a resident of such home state to serve in like fiduciary capacity, and (3) the out-of-state trust company complies with the filing requirements of Section 505.004, Estates Code. See Section 187.005, Finance Code, and Texas Atty. Gen. Op. No. JM-1032 (1989).

The Texas Attorney General, in Opinion No. JM-1032, addressed a situation similar to the proposed scenario presented in this matter. An out-of-state trust company proposed to supply information and forms to brokers employed by an affiliated Texas brokerage firm, with the intent that they be distributed to customers of the firm who make general inquiries about the availability of trust services. Interpreting Section 105A, Texas Probate Code, the predecessor statute to current Subchapter A, Chapter 505, Estates Code, the Attorney General ruled that the arrangement violated Texas law, and any appointments as trustee obtained by the out-of-state trust company pursuant to the unlawful plan of business would also violate Texas law. As stated in Opinion JM-1032, “[a] design to prompt inquiries, or to respond to general inquiries with a presentation of the benefits offered by the foreign trust company and its services, is a design to circumvent the statute...”

As a result of and coincident with the modernization of Texas law regarding interstate offices and activities of trust institutions, the prohibition on solicitation no longer appears in Subchapter A, Chapter 505, Estates Code. A conforming amendment made to Section 105A, Probate Code by Acts 1999, 76th Leg., R.S. ch. 344, § 6.002, removed the prohibition. The same Act also enacted the predecessor statute to Section 187.002, Finance Code, quoted above.1 An out-of-state trust company is thus permitted to engage in and may solicit trust business in Texas upon compliance with the requirements of Chapter 187, Finance Code.

Section 187.201(a)(1), Finance Code, specifically permits a registered trust representative office of an out-of-state trust institution to “solicit, but not accept, fiduciary appointments…” By negative implication, an out-of-state trust company that does not have an office in Texas may not directly or indirectly solicit fiduciary appointments from Texas residents, and would be subject to an enforcement action for unauthorized activity in Texas in the event of any such solicitation, see Section 187.202(f), Finance Code.

Conclusion:

The Company would violate Texas law by engaging an individual in Texas on an independent contractor basis to solicit trust business for the Company, as proposed. Such conduct constitutes the establishment by the Company of a de facto representative trust office in Texas without first complying with the requirements of Subchapter C, Chapter 187, Finance Code.

Without limiting other options, a representative trust office can be established at the address of the home or office of the individual engaged by the Company to solicit trust business, even if the location will not be represented as offices of the Company, no Company signage would be posted at such locations, the addresses of such locations would not be included on Company letterhead/correspondence or marketing materials, and the individual would not conduct meetings at such locations with clients or prospective clients.

Opinion No. 09-01

The Bank's leases purchased from Lessor will be considered to be loans to the Lessor, attributed to it as the borrower and aggregated with the Bank's other loans and extensions of credit to Lessor, and will not be considered to be loans to the individual lessees.

February 24, 2009

Mary Kelly Pauwels, Assistant General Counsel

This opinion responds to your November 10, 2008 opinion request concerning whether leases purchased from Lessor should be considered loans to the Lessor or to the individual lessees for legal lending limit purposes under Texas Finance Code §34.201 and Title 7, Texas Administrative Code (TAC) §12.7(b). In the Texas Department of Banking's recent report of examination of the Bank, Examiner [*****] cited the Bank for apparent legal lending limit violations under Finance Code §34.201 arising from the Bank's purchase of leases from Lessor. You requested a legal opinion on the validity of this citation for legal lending limit violations and asked how the Bank could resolve any past, and avoid any future, legal lending limit violations arising from these lease purchases.

Summary of Opinion:

The Bank's leases purchased from Lessor will be considered to be loans to the Lessor, attributed to it as the borrower and aggregated with the Bank's other loans and extensions of credit to Lessor, and will not be considered to be loans to the individual lessees. The Lessor collects the lease payments, deposits the payment checks into its corporate account at another bank, and then makes one monthly payment on all the leases to the Bank. This lease payment arrangement does not meet the requirement of 7 TAC §12.7(b)(5) that lease payments must be paid to the bank directly by the lessee, one of six requirements that must be met for leases purchased by a bank from a leasing company to be attributed to the lessee and not the leasing company for legal lending limit purposes. However, the Bank may satisfy 7 TAC §12.7(b)(5) by restructuring its lease payment arrangement on all the leases purchased from Lessor to require lessees to make payments directly to the Bank by sending them to a lockbox controlled by the Bank. If the leases purchased from Lessor also satisfy the other five conditions set forth in 7 TAC §12.7(b), then the leases will be considered loans to the lessees and not attributed to Lessor and aggregated with its other Bank loans and extensions of credit under Texas Finance Code §34.201.

Background:

During a recent examination of [Bank] by the Department of Banking (DOB), Examiner [***** ] cited the Bank for apparent violations of the legal lending limits under Texas Finance Code §34.201 for leases the Bank purchased from Lessor which [*****] determined should be attributed to Lessor and aggregated with the Bank's other loans and extensions of credit to Lessor. At the time of the examination, the leases the Bank had purchased from Lessor totaled $6,584,311, exceeding the Bank's legal lending limit of $1,821,000.1  According to DOB's report of examination, Lessor leases equipment to different entities, and the bank finances these lease transactions by purchasing the lease paper from Lessor. In your letter, you represent that the Bank purchases leases from Lessor, and that each lease is underwritten on its own merits by the Bank and has been appropriately assigned to the Bank. Your letter also states that Lessor services the leases for the Bank, collects the payments, deposits them into its corporate account at a different bank, and then makes one payment to the Bank each month. According to the examination report, the monthly payment by Lessor includes a breakdown of the individual payments from each lessee. Examiner [*****] attributed all the leases to Lessor and aggregated them with the Bank's other loans to Lessor for legal lending limit purposes under Finance Code §34.201, because the lease payments do not come directly to the Bank from the lessees, as required by 7 TAC §12.7(b)(5).

Discussion:

Under Texas Finance Code §34.201(a), absent the prior written approval of the Banking Commissioner, the total loans and extensions of credit by a state bank to a person outstanding at one time may not exceed 25% of the lesser of the bank's unimpaired capital and surplus.2  The term "loans and extensions of credit" is defined in Texas Finance Code §31.002(a)(34) as "...direct or indirect advances of money by a state bank to a person that are conditioned on the obligation of the person to repay the money or that are repayable from specific property pledged by or on behalf of the person." (Emphasis added.) Finance Code §34.204, which permits state banks to provide the equivalent of a financing transaction by acting as a lessor under a lease for the benefit of a customer,3  provides that a lease financing transaction is considered to be a loan or extension of credit for purposes of §34.201. 4 

The Texas Finance Commission created an exception by rule, in 7 TAC §12.7(b), to the legal lending limit in Finance Code §34.201 5 for loans to leasing companies where the loans satisfy six stated conditions.6  A loan to a leasing company for the purpose of purchasing equipment for lease is considered a loan to the lessee, under 7 TAC §12.7(b), provided that:

(1)  the bank documents the basis for its reliance on the lessee as the primary source of repayment before the loan is extended to the leasing corporation;

(2)  the loan is without recourse to the leasing corporation;

(3)  the bank receives a security interest in the equipment and, in the event of default, may proceed directly against the equipment and the lessee for any deficiency resulting from the sale of the equipment;

(4)  the leasing corporation assigns all of its rights under the lease to the bank;

(5)  the lessee's payments are assigned and paid to the bank directly by the lessee; and

(6)  the lease terms are subject to the same limitations that would apply to a state bank acting as a lessor under the Finance Code, §34.204.

The leases the Bank purchased from Lessor do not satisfy the condition in Section 12.7(b)(5), as correctly cited by Examiner [*****] in his examination of the Bank. Lessor collects the payments for all the leases purchased by the Bank, deposits the payments into Lessor's account at another bank, and then makes one monthly payment to the Bank for all the leases. Such monthly payment by Lessor does not constitute a payment to the bank directly by the lessee on each lease to the Bank as 7 TAC §12.7(b)(5) requires. Therefore, all the leases the Bank purchased from Lessor, in which the payments are collected by Lessor and paid to the Bank in this manner, are properly attributable to Lessor and not to the lessees. Consequently, these leases must be aggregated with the Bank's other loans and extensions of credit to Lessor for legal lending limit purposes under Finance Code §34.201.

The Department of Banking reached the same conclusion in Opinion No. 02-01, published in the DOB Law and Guidance Manual, 7  on a very similar legal lending limit question.  In that opinion, Assistant General Counsel Robin Robinson determined that loans under a proposed leasing program in which the leasing company was to service leases it had assigned to a bank should be attributed to the leasing company and not be considered loans to lessees. The program provided for: the lessees to mail checks payable to the bank for their lease payments to a lockbox controlled by the leasing company at another bank; the bank to authorize the leasing company to deposit, endorse, and otherwise negotiate the individual lease payments; and the leasing company to deduct monthly taxes from those payments and then remit the remaining payments to the bank. The opinion found that the payment arrangement did not constitute "a direct payment from the lessee to the Bank" as 7 TAC §12.7(b)(5) requires.8 

The opinion also considered whether a leasing company could act as a servicing agent for a bank to which it had assigned leases, if subsection (b)(5) was otherwise met. The same question arises in this opinion request, as well, as the Bank authorized Lessor to service the leases it sold to the Bank. Opinion 02-01 found that servicing by the leasing company would be "permissible when the activities of the leasing company are limited to collecting lease payments and submitting them to the Bank." However, the leasing company's negotiation and control of the lease payments went beyond merely collecting and delivering the payments to the bank and thus failed to meet the requirements under 7 TAC §12.7(b)(5), the opinion concluded.

The Office of the Comptroller of the Currency (OCC), in a 2003 interpretive letter,9  also reached the same conclusion in addressing a similar question under the OCC's lease financing rule applicable to national banks. That rule, Title 12, Code of Federal Regulations (CFR) §32.3(c)(10),  has six conditions similar to those stated in 7 TAC §12.7(b). Subsection (c)(10)(v) requires that "the lessee's lease payments are assigned and paid to the bank...." The OCC found during an examination that the bank in question had violated its legal lending limit 10 because the leases assigned as security for the bank's loans to a leasing company met only five of the six conditions of 12 CFR §32.3(c)(10). The OCC's examiners found that the leases failed to meet Subsection (c)(10)(v)'s requirement because the lessees made their payments to the leasing company and it remitted the payments on a monthly basis to the bank.

The OCC, in the interpretive letter, approved a modification proposed by the bank to the lease servicing arrangement which would require the lessees to make their lease payments to a lockbox account controlled by the bank. With the lockbox procedure in place, the leasing company could continue to provide billing and collections for the leases assigned to the bank, the OCC concluded.11  

Conclusion:

Based on the above authority, the Bank may satisfy 7 TAC §12.7(b)(5) by restructuring its lease payment arrangement on all the leases purchased from Lessor to require the lessees to make payments directly to the Bank by sending them to a lockbox controlled by the Bank. If the leases purchased from Lessor also satisfy the other five conditions set forth in 7 TAC §12.7(b), then the leases will be considered loans to the lessees and not attributed to Lessor and aggregated with its other Bank loans and extensions of credit for legal lending purposes under Texas Finance Code §34.201.

Our conclusion is based only on the facts, circumstances, assumptions and representations stated in this letter. Any change in those facts, circumstances, assumptions or representations could result in a different conclusion. Furthermore, our conclusion should not be construed as an endorsement of the creditworthiness or suitability of any proposed loan. 

As you are undoubtedly aware, a bank must heed the underlying purpose of the legal lending limit, reduction of risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of the state bank's funds. The bank, therefore, must appropriately evaluate and manage the risks inherent in such lending activities. An examiner will closely scrutinize these types of loans to monitor the bank's adherence to its policies and procedures and to ensure that the bank is administering such loans in a manner that is consistent with safe and sound banking practices.

Opinion No. 08-03

A loan attributed to its guarantor, for legal lending limit purposes, need not remain attributed for the life of the loan if certain conditions are met and the bank conducts a thorough review and re-underwriting of the obligor's creditworthiness and overall relationship with the bank.

July 31, 2008

Robert L. Bacon, Deputy Commissioner

You requested that the Department answer a question regarding the application of the lending limits requirements of Texas Finance Code §34.201 and 7 Texas Administrative Code §12.9 to the guarantor of an existing loan and a proposed new loan by your client (Bank).

You stated that the Bank wishes to retain as much as legally permissible of a proposed loan (New Loan) to a limited partnership (New Obligor) to build a retail strip center. New Obligor's general partner is a limited liability company (LLC) which has a 1% ownership interest in New Obligor. The sole manager of LLC is an individual (Guarantor) who is to provide an unlimited personal guaranty of the New Loan. Guarantor has a 49% limited partnership interest in New Obligor, with another limited partner holding the remaining 50% limited partnership interest. In making the New Loan, the Bank also expects to require an unlimited personal guaranty of the loan from the other limited partner of New Obligor.

Guarantor previously guaranteed a loan (Existing Loan) to another limited partnership (Existing Obligor). The general partner of Existing Obligor is a corporation (Inc.), with a 1% ownership interest. Guarantor serves as president of Inc. Guarantor has a 99% limited partnership interest in Existing Obligor, and has personally guaranteed the Existing Loan.

The Bank made the Existing Loan to Existing Obligor to build a retail strip center. You represent that the center is now 100% leased and provides cash flow such that, if the Bank were originating the Existing Loan today, the Bank would be able to rely on Existing Obligor for the repayment of the loan rather than on the guaranty of Guarantor.

You asked the Department to assume, for the purposes of answering your question, that the legal lending limit for the Bank is less than the combined amounts of New Loan and Existing Loan.

Queston Presented

Whether the Existing Loan, made in reliance on the guaranty of Guarantor and attributed to Guarantor at inception, must be attributed again to Guarantor and combined with the New Loan  proposed to be guaranteed by Guarantor for legal lending limit purposes, where the Existing Obligor generates sufficient cash flow such that, if the Bank were making the Existing Loan today, it could demonstrate reliance on the Existing Obligor and not on the Guarantor.

Summary Conclusion

In our opinion, Texas Finance Code §34.201 and 7 Texas Administrative Code §12.9 do not require the derivative obligation of Guarantor on the Existing Loan to be attributed to the Guarantor and combined with the New Loan proposed to be guaranteed by Guarantor, provided the Bank demonstrates that:  (1) it is currently relying on the Existing Obligor for repayment of the Existing Loan; and (2) it would make the Existing Loan in reliance on the Existing Obligor for repayment and not on the Guarantor, if the Bank were making the Existing Loan today. The Bank must re-underwrite the Existing Loan, as specified below, to demonstrate reasonable reliance on the Existing Obligor's current creditworthiness for repayment of the Existing Loan, rather than on the guaranty of the Guarantor.

Discussion

Under Texas Finance Code §34.201(a), absent the prior written approval of the Banking Commissioner, the total loans and extensions of credit by a state bank outstanding at any one time to a person may not exceed 25% of the lesser of the bank's unimpaired capital and surplus.1  The term "loans and extensions of credit" is defined in Texas Finance Code §31.002(a)(34) as "...direct or indirect advances of money by a state bank to a person that are conditioned on the obligation of the person to repay the money or that are repayable from specific property pledged by or on behalf of the person."

Aggregation and attribution for legal lending limit purposes are addressed by 7 Texas Administrative Code Section 12.9. The general rule is set forth in subsection (a), which provides that a loan or extension of credit to one borrower is attributed to another person, and each person will be considered a borrower, if:  (1) proceeds of the loan or extension of credit are to be used for the direct benefit of the other person, (2) a common enterprise is deemed to exist between the persons, (3) the expected source of repayment for each loan or extension of credit is the same for each person, or (4) notwithstanding another provision of Section 12.9, the banking commissioner determines that a loan should be attributed to another person.

For attribution based on a guaranty, Subsection (g) of the rule provides that the derivative obligation of a guarantor will not be aggregated with direct loans or extensions of credit of the guarantor if the bank reasonably is "relying primarily on the creditworthiness of the primary obligor and none of the tests set forth in this section [the direct benefit, common enterprise, and source of repayment tests] are satisfied." The reliance of the lending bank on the primary obligor must be evidenced by the certification of an officer of the bank that the bank is, on stated facts, reasonably relying primarily on the responsibility and financial condition of the primary obligor for payment of the loan and not on the guaranty of the guarantor.

Subsection (g) concludes by stating as follows:

In the event that the loan or extension of credit to the primary obligor, considered by the bank to be of sufficient credit quality at its inception, experiences subsequent deterioration to the point that the primary obligor is no longer performing in accordance with the terms of the initial loan agreement, such event will not result in a lending limit violation on behalf of the guarantor by virtue of the primary obligator's nonperformance. However, the total amount of the deteriorated loans guaranteed by such accommodating person must be combined with all other obligations of such guarantor in determining whether the guarantor may obtain additional loans or extensions of credit from the bank.

This guaranty test is a specialized application of the source of repayment test, i.e., whether the expected source of repayment is actually the guarantor.2

The Bank asserts that there has been an improvement in the credit quality of the Existing Loan and thus in the creditworthiness of the Existing Obligor since the inception of the Existing Loan, such that the Bank is now relying on the Existing Obligor as the source of repayment of the Existing Loan and not on the guaranty of the Guarantor. 

Thus, the Existing Loan and guaranty here at issue present the reverse of the loan and guaranty described in the last two sentences of Subsection (g). If Subsection (g) requires a bank to attribute to a guarantor all loans guaranteed by that guarantor which have deteriorated to the point that the primary obligor is no longer performing, then the rule logically applies as follows to the reverse situation. An existing loan made in reliance on a guaranty and attributed to the guarantor at inception need not be attributed again to the guarantor and combined with a new loan to be guaranteed by the guarantor for legal lending limit purposes, if the creditworthiness of the existing loan has improved to the point that the primary obligor is fully performing and presenting sound and reasonable repayment capacity, collateral margins, and financial support. However, the bank must re-underwrite the loan, as further specified below, to prove its reasonable reliance on the primary obligor, rather than on the guarantor, for repayment of the existing loan .3

In our opinion, therefore, Subsection (g) will not require the derivative obligation of Guarantor on the Existing Loan to be attributed to the Guarantor and aggregated with the New Loan to be guaranteed by Guarantor, if the Bank re-underwrites the loan to document the Existing Obligor's current creditworthiness for the Existing Loan. For this post-inception underwriting, the Bank should undertake and document a detailed analysis of the current payment capacity and financial strength of the Existing Obligor, an evaluation of current collateral support for the Existing Loan, and an assessment of current market conditions and other credit enhancements. The resulting analysis should be of similar quality and detail to the underwriting by the Bank of a new loan of similar size and complexity. Considering the size of the relationship and the legal issues, the Bank's Board of Directors loan committee should evaluate and approve the analysis.

Our conclusion is based only on the facts, circumstances, assumptions and representations stated in this letter. Any change in those facts, circumstances, assumptions or representations could result in a different conclusion. Furthermore, our conclusion should not be construed as an endorsement of the creditworthiness or suitability of any proposed loan. 

As you are undoubtedly aware, a bank must heed the underlying purpose of the legal lending limit, reduction of risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of the state bank's funds.  The bank, therefore, must appropriately evaluate and manage the risks inherent in such lending activities. An examiner will closely scrutinize these types of loans to monitor the bank's adherence to its policies and procedures and to ensure that the bank is administering such loans in a manner that is consistent with safe and sound banking practices.

Opinion No. 08-02

A state bank is authorized to make credit decisions at its loan production office so long as it does not disburse loan proceeds to the borrower in person at the loan production office.

October 3, 2008

Deborah H. Loomis, Assistant General Counsel

In connection with your notice letter to the Texas Department of Banking (Department) dated September 5, 2008, regarding the establishment of a loan production office (LPO), you have requested, as a matter of parity with national banks, permission for credit decisions to be made at [Bank]'s LPO.

You state, in pertinent part, as follows:

The office will perform loan processes permitted under §32.204 of the Texas Finance Code, and Chapter 7, §3.91 of the Texas Administrative Code pertaining to loan production offices.  Addtionally, we request, as discussed below, that appropriate officers in the LPO may also be permitted to make credit decisions regarding loan applications as permitted under the parity provisions of §32.009 of the Texas Finance Code. . . .

The Bank will initially staff this loan production office with two individuals, one of whom will be [the] President and Chief Lending Officer of the Bank, the other being his assistant. . . .

This office will not disburse loan proceeds to the borrower in person; those proceeds will be funded at the Bank's [home] office or through an attorney office or escrow agent, in the case of a real estate loan closing.

This facility will not be a branch office in the context that it will not receive deposits, pay checks or perform other services associated with the business conducted at a full service branch.

Letter from [Chief Executive Officer of Bank]. (Bank Letter)

Question Presented

Whether a state bank may make credit decisions at its LPO if it does not disburse loan proceeds at the LPO.

Summary Conclusion

In our opinion, a state bank has the authority to make credit decisions at its LPO so long as it does not disburse loan proceeds to the borrower in person at the LPO.

Discussion

Texas state banks are prohibited by statute from making credit decisions at an LPO.  Texas Finance Code §32.204(a).  However, Texas Finance Code §32.009(b), sets forth a mechanism whereby a state bank that intends to exercise a right or privilege granted to national banks that is not authorized for state banks under the statutes and rules of this state may submit a letter to the banking commissioner detailing the activity and providing authority for national banks to engage in that activity.  Your letter is such a letter.  The banking commissioner may prohibit the Bank from performing the activity only if he finds that:

1.  a national bank domiciled in this state does not possess the specific right or priviledge to perform the activity the bank seeks to perform; or

2.  the performance of the activity by the bank would adversely affect the safety and soundness of the bank.

Texas Finance Code §32.009(b)

The Comptroller of the Currency is the primary regulator of national banks.  The Comptroller has issued a regulation which specifically authorizes a national bank to make credit decisions at a branch other than its main office or a branch office.  12 Code of Federal Regulations (CFR) § 7.1005 states as follows:

A national bank and its operating subsidiary may make a credit decision regarding a loan application at a site other than the main office or a branch office of the bank without violating 12 U.S.C. 36 and 12 U.S.C. 81, provided that "money" is not deemed to be "lent" at those other sites within the meaning of §7.1003.

12 CFR § 7.1005.

12 CFR § 7.1003(a) deems money to be "lent" only at the place, if any, where the borrower in-person receives loan proceeds.  Section 7.1003(b) allows loan proceeds to be received by a borrower at an office other than the bank's main office or a branch so long as a third party such as an attorney or escrow agent at a real estate closing is used to deliver the funds.  You have represented that the LPO "will not disburse loan proceeds to the borrower in person; those proceeds will be funded at the Bank's [home] office or through an attorney office or escrow agent, in the case of a real estate loan closing."  Bank Letter at 1.  Therefore, under federal law, money is not lent at the LPO and credit decisions may be made at the LPO. 1 A national bank domiciled in this state possesses the specific right or privilege to perform the activity the Bank seeks to perform.  The Bank is not prohibited from making credit decisions at the LPO pursuant to Texas Finance Code §32.009(b)(1).

The Department has also reviewed [the President and Chief Lending Officer's] qualifications.  Given the assumption that all loans, wherever granted, will comply with the bank's general loan policies, the location where [the President and Chief Lending Officer] or persons he supervises underwrite and approve loans has no negative safety and soundness implications and, we believe, significant operating benefits to the Bank.  See, Texas Finance Code § 32.009(b)(2).  Therefore, we conclude that the Bank may make credit decisions at its LPO subject to the conditions that at all times the totality of activities performed at the LPO would be permissible for a national bank, and that all loans will comply with the general loan policies of the Bank.  Please note that we are sending a copy of this letter to the Federal Deposit Insurance Corporation as it also regulates the Bank's activities.

Your request for a waiver of the 30-day waiting period is also granted.  You may establish your LPO at [address], [City], Texas at any time after October 3, 2008.

The Department's conclusion that the Bank may make credit decisions at the LPO is based upon the written and verbal representations from you and other representatives of the Bank regarding the Bank's activities.  We caution that our conclusion is limited to the facts and circumstances you have presented.  If we have in any way misunderstood the facts, or if they in any way materially change, please advise the Department immediately.

Opinion No. 08-01

A state bank has the authority to guarantee the performance of a transaction to which the bank's operating subsidiary is a party.

July 10, 2008

Everette D. Jobe, Senior Counsel

By letter dated February 6, 2008, you requested a determination from the Department regarding the authority of a state bank to guarantee certain transactions undertaken by its operating subsidiary.  You stated that your client, [Bank], [City], TX is a state bank in the process of forming a wholly owned subsidiary corporation that it intends to operate as a mortgage company.  You advise that circumstances may potentially arise in connection with the closing and contemplated sale of mortgage loans to various investors that would require the mortgage company to repurchase a previously sold loan.  Because certain investors demand assurance that the mortgage company has the financial capacity to meet such liability, they seek a "parental" guaranty from the state bank of the repurchase obligations of its newly formed, subsidiary mortgage company.

Question Presented

Whether a state bank has the authority to guarantee the performance of a transaction to which the bank's operating subsidiary is a party.

Summary Conclusion

In our opinion, a state bank has the authority to guarantee the performance of a transaction to which the bank's operating subsidiary is a party.

Discussion

Former 7 TAC §11.83(b) provided that a state bank could "lend its credit, bind itself as a surety to indemnify another, or otherwise become a guarantor, if it has a substantial interest in the performance of the transaction involved or has a segregated deposit in sufficient amount to cover the bank's total potential liability."  Although this section was repealed in 2002, we noted in connection with the repeal that the rule had been originally adopted in 1982 to help state banks remain competitive by authorizing certain powers and activities for state banks that were already authorized for national banks, and became unnecessary after the 1984 constitutional amendment to Texas Constitution, Article XVI, §16(c), that granted state banks "the same rights and privileges that are or may be granted to national banks of the United States domiciled in this State." 27 TexReg 8203 (Aug. 30, 2002).

A national bank has authority to act as a guarantor if it has a substantial interest in the performance of the transaction involved or if the guarantee is for the benefit of a customer and the bank has a segregated deposit in sufficient amount to cover the bank's total potential liability, see 12 CFR §7.1017(a).  Therefore, pursuant to Article XVI, §16(c) of the Texas Constitution, we conclude that a state bank has the authority to lend its credit, bind itself as a surety to indemnify another, or otherwise become a guarantor if (1) the bank has a substantial interest in the performance of the transaction involved, or (2) the transaction is for the benefit of a customer and the bank obtains from the customer a segregated deposit that is sufficient in amount to cover the bank's total potential liability.

Citing 12 CFR §7.1017(a), the Office of the Comptroller has concluded that a national bank always has a substantial interest in the financial performance of a subsidiary, see OCC Interpretive Letter 1010 (Oct. 2004).  Because the financial condition and results of operation of a bank's operating subsidiaries are reported on a fully consolidated basis in the bank's financial statements, the consolidated risk profile of the bank is not altered if the bank guarantees a transaction with its operating subsidiary, whether on behalf of the subsidiary or for another party to the transaction.  We therefore concur with the OCC to the extent necessary to conclude that a state bank has a substantial interest in the performance of a transaction to which the bank's operating subsidiary is a party, cf. Department of Banking Opinion No. 96-49 (March 5, 1997).

Finally, we note that the OCC has recently amended 12 CFR §7.1017, effective July 1, 2008, to potentially expand national bank guaranty authority, see 73 FR 22216, at 22225-22227 (April 24, 2008).  As amended, 12 CFR 7.1017(b) provides that "a national bank may guarantee obligations of a customer, subsidiary or affiliate that are financial in character, provided the amount of the bank's financial obligation is reasonably ascertainable and otherwise consistent with applicable law."  You have not indicated whether the bank guaranty of certain operating subsidiary transactions is "financial in character" and, if so, whether the amount of the anticipated bank obligation is "reasonably ascertainable."  However, depending on undisclosed circumstances, we believe new 12 CFR §7.1017(b) may provide an independent basis for our conclusion that a state bank can guarantee an obligation of the bank's operating subsidiary.

I hope that this letter is fully responsive to your inquiry.  Please feel free to contact me if you have any additional questions or concerns.

Opinion No. 07-01

A remote service unit is not a "branch" under Texas law and is not otherwise subject to licensure or registration.

February 20, 2007

Everette D. Jobe, Senior Counsel

By letter dated December 20, 2006, you described the intent of your client, an FDIC-insured out-of-state state-chartered bank without a location in Texas, to provide its business customers in Texas with the ability to process checks received from their customers by use of an on-site remote deposit capture machine. You ask the Department to confirm your understanding that Texas law would permit the Bank to install a remote deposit capture machine in Texas at each such customer's place of business. You further request confirmation that these machines would not be required to be licensed on the basis that the machines are not bank branches under Texas law.

Question Presented

Whether a remote deposit capture machine established and maintained in Texas by a depository institution constitutes a branch under Texas law.

Summary

A remote service unit, as defined by 12 C.F.R. §7.4003, is not a "branch" under Texas law within the meaning of Texas Finance Code §31.002(a)(8) or §201.002(a)(8).  A remote service unit as defined includes a remote deposit capture machine.  Therefore, an out-of-state bank without a location in Texas may install and maintain a remote deposit capture machine at its customer's place of business in Texas. A remote service unit is not subject to licensure or registration under Texas law.

Facts

The Bank, an FDIC-insured out-of-state state-chartered bank, currently has offices in various states, not including Texas.  The Bank intends to provide its business customers located within Texas the ability to process checks received from their customers by use of a remote deposit capture machine, to be located on the business customers' business premises and operated by personnel of the business customer as a back-office facility.  The remote deposit capture machine will remotely transmit the data located on the checks to a third-party processor which will then remit the data to the Bank for processing and deposit.  The Bank will provide these machines to its business customers located in Texas.

Analysis

The term "branch" is defined by Texas Finance Code §31.002(a)(8) as "a location of a bank, other than the bank's home office, at which the bank engages the public in the business of banking," subject to specific exclusions.

Among the exclusions is an "electronic terminal," a term defined in Finance Code §31.002(a)(19) as "an electronic device, other than a telephone or modem operated by a customer of a depository institution, through which a person may initiate an electronic fund transfer, as defined by 15 U.S.C. Section 1693a(6)."  The incorporated definition of an "electronic fund transfer" is found in the federal Electronic Fund Transfer Act, generally limited in application to electronic transactions affecting customers who are natural persons.  A remote deposit capture machine operated by a business customer would therefore not be an electronic terminal for purposes of the federal Electronic Fund Transfer Act, see 15 U.S.C. Section 1693a(7).  We conclude that a remote deposit capture machine is not an "electronic terminal" within the meaning of Finance Code §31.002(a)(19).  Nevertheless, as explained below, we conclude that the device is a "remote service unit"1 that should be excluded from the definition of "branch."

Pursuant to 12 U.S.C. Section 36(j), the term branch "does not include an automated teller machine or a remote service unit."   The Office of the Comptroller of the Currency, on behalf of national banks, has defined a remote deposit capture machine such as you describe as a "remote service unit" in 12 C.F.R. §7.4003:

§ 7.4003   Establishment and operation of a remote service unit by a national bank.  A remote service unit (RSU) is an automated facility, operated by a customer of a bank, that conducts banking functions, such as receiving deposits, paying withdrawals, or lending money. A national bank may establish and operate an RSU pursuant to 12 U.S.C. 24(Seventh). An RSU includes an automated teller machine, automated loan machine, and automated device for receiving deposits. An RSU may be equipped with a telephone or televideo device that allows contact with bank personnel. An RSU is not a "branch" within the meaning of 12 U.S.C. 36(j), and is not subject to state geographic or operational restrictions or licensing laws.

[Emphasis added.]

Article 16, §16(c) of the Texas Constitution provides that a state bank "has the same rights and privileges that are or may be granted to national banks of the United States domiciled in this State." Also see Texas Finance Code §32.009.  Because a national bank has the authority to install and utilize a remote deposit capture machine at a customer's place of business in Texas, pursuant to Article 16, §16(c) of the Texas Constitution, we conclude that a Texas state bank may do so under the same terms and conditions.  Therefore, a remote service unit established and operated by a Texas state bank is not a "branch" within the meaning of Texas Finance Code §31.002(a)(8).  Although this conclusion does not contravene any explicit statutory prohibition in Texas law, as authorized by Texas Finance Code §31.002(a)(8)(H), we will likely pursue adoption of a rule that specifically excludes a "remote service unit" from the definition of "branch."

With respect to your specific inquiry, we also conclude that an out-of-state bank without an office in Texas may establish and operate remote service units in Texas.  Texas branching by an out-of-state bank is governed by Chapter 203 of the Texas Finance Code.  The relevant definition of "branch," set forth in Texas Finance Code §201.002(a)(8), incorporates the definition of "branch" in  Texas Finance Code §31.002(a)(8).  Therefore, we find that a "branch" for purposes of Texas Finance Code Chapter 203 similarly does not include a remote service unit as defined in 12 C.F.R. §7.4003.

Finally, we conclude that the filing requirements of Texas Finance Code §201.102 would not apply to the Bank.  Texas Finance Code §201.102 requires an out-of-state financial institution, before operating a branch or other office in Texas, to qualify to do business in this state by filing an application for registration with the secretary of state in compliance "with the law of this state relating to foreign corporations doing business in this state."  The Bank will not be operating a branch or other office in Texas.  Further, establishing and operating remote service units in Texas would not invoke the foreign corporation qualification provisions of Texas law, see Texas Business Organizations Code §9.251(9).

This opinion is limited to the facts and circumstances set forth in your letter.  Any change in those facts or circumstances may result in a different opinion.

I hope that this letter is fully responsive to your inquiry.  Please feel free to contact me if you have any additional questions or concerns.

Opinion No. 04-03

A loan to a joint venture is considered a loan to a member of the joint venture that is a partnership and to the general partner of that partnership under 7 TAC §12.9(f)(1).

May 7, 2004

Shannon Phillips Jr., Assistant General Counsel

This letter is in response to your March 26, 2004 letter, in which you ask about the applicability of the legal lending limit provisions of the Texas Finance Code and related regulations to a certain proposed loan.

Question Presented:

You asked for our concurrence that neither Finance Code §34.201 nor 7 TAC §12.9 require a proposed bank loan to a joint venture (the "Loan") to be aggregated with the bank's loans to two limited partnerships that share a general partner with a third limited partnership that is a member of the joint venture.

Summary Response:

Under 7 TAC §12.9(f)(1), the Loan is considered a loan to the limited partnership member of the joint venture, and as a loan to the limited partnership, the Loan is likewise considered a loan to the limited partnership's general partner.  Because all three limited partnerships mentioned in your letter share a general partner, the Loan and the loans to the limited partnerships are all considered loans to their common general partner and are aggregated for lending limit purposes.

Discussion:

A Texas state-chartered bank (Bank) has a lending limit of $1.5 million. The bank loaned $345,000 to a limited partnership ("LP1") and $775,000 to another limited partnership ("LP2") that have the same corporation as general partner (Corporation). The Corporation is wholly owned by an individual named Sam who has executed limited guaranties of the loans to LP1 (24%) and LP2 (18%).  LP1 and LP2 each own income-generating real property as the expected source of repayment of its loans from the Bank.  Corporation is the general partner of a third limited partnership ("LP3").  LP3 owns 49.5% of a joint venture ("JV"); an unrelated third party ("UTP") owns 50.5% of JV.  The Bank wants to make a $500,000 loan to JV ("Loan"), guaranteed by Sam, for construction of a single-family residence that will be sold to repay the loan.

You state that you understand that, under 7 TAC §12.9(f)(1), a loan to JV is considered a loan to LP3 and UTP because they are members of JV; however, you express confusion as to whether the loan would also be considered a loan to the Corporation, as general partner of LP3.  Your letter presumes that §12.9 would not attribute the Loan to the Corporation because, if it meant to do so, it would provide for aggregation when, as you put it, "the partners are directly or indirectly liable for the obligations of the partnership or joint venture, in a manner similar to the way that affiliation is determined by direct or indirect control in §12.9(c)(2).

We disagree with your assertion that 7 TAC §12.9 does not attribute the Loan to Corporation.  As you recognize, §12.9(f)(1) provides that "a loan or extension of credit to a partnership, joint venture, or association is considered to be a loan or extension of credit to each member of the partnership, joint venture, or association...."1  Therefore, because LP3 is a member of JV, the Loan would be considered a loan to LP3.  Likewise, because the Loan is considered a loan to LP3, we must treat the Loan as we would any other Bank loan to LP3 and consider it a loan to LP3's general partner, Corporation, as required by §12.9(f)(1).  To rule otherwise would nullify §12.9(f)(1); borrowers could merely form one or more partnerships, joint ventures or associations to evade the legal lending limits without affecting the risks involved.

Conclusion:

Under 7 TAC §12.9(f)(1), the Loan is considered a loan to the limited partnership member (LP3) of the joint venture, and as a loan to LP3, the Loan is likewise considered a loan to the general partner of LP3.  Because LP1, LP2, and LP3 share a general partner, the Loan and the loans to the limited partnerships are all considered loans to their common general partner.  Thus, the proposed $500,000 loan to JV must be aggregated with the $345,000 loan to LP1 and the $775,000 loan to LP2.

Because the remainder of your letter rests on your conclusion that the Loan will not be attributed to Corporation—a conclusion with which we disagree—it is not necessary for us to comment on it further.  If you have any questions or comments regarding this opinion, please feel free to call me.

Opinion No. 02-04

Assuming certain conditions are satisfied, the portfolio investments of affiliated mutual fund investment companies that, in the aggregate, total no more than 15 percent of the voting shares of a state bank will not cause the companies or their sponsor to be considered to have acquired "control" of the bank for purposes of the prior approval requirements of Texas Finance Code §33.001.

October 4, 2002

Shannon Phillips, Jr., Assistant General Counsel

I write in response to the letter you submitted last year to the Texas Department of Banking (Department), written on behalf of [***] and its related mutual fund investment companies and managed accounts (Fund or Funds).  Please accept our apologies for the delay in response.

Questions Presented:

Finance Code, Chapter 33, Subchapter A imposes certain requirements in connection with the transfer of ownership interests in state-chartered banks.  Under Finance Code, §33.001, a person must obtain the prior approval of the Texas Banking Commissioner (Commissioner) before acquiring an interest in the voting shares of a state bank if, after the acquisition, the person would control the bank.  You ask whether the Department would aggregate the proposed investments of an individual Fund in a state bank with the proposed investments of another Fund in the bank so as to subject the investing Funds to the change of control provisions of Finance Code, §§33.001 et seq.  If the Department concludes that the proposed investments would in fact implicate the statute, you ask the Commissioner to find that regulation of the investments is not necessary or appropriate to achieve the purposes of the statute and, impliedly, to exempt the transactions from the prior approval requirement.  Additionally, you ask the Commissioner to defer to the Board of Governors of the Federal Reserve Board (Fed) should the agreement entered into between [***], the Funds and the Fed (Fed Agreement) under the Change in Bank Control Act, 12 U.S.C. §1817(CBCA), require clarification or modification.

Summary Conclusion:

The Department concludes that the proposed Funds investment transactions trigger the change of control provisions of Finance Code, §33.001, because [***], as the Funds' investment advisor, ultimately determines how the state bank shares held in individual Fund portfolios should be voted.  However, the Commissioner believes that the purposes and objectives of Finance Code, §33.001, are achieved, and exempts [***] from the statute's prior approval requirements, if [***] and the Funds are organized as and adhere to the policies described in your letter, comply with the Fed Agreement, and operate within currently applicable federal and state laws.  Additionally, [***] must enter into a separate agreement with the Department whereby [***] agrees to seek the Department's approval should the Fed Agreement be clarified or modified, or if any change occurs with respect to the laws, circumstances or facts set out in your letter of January 31, 2001.

Applicable Texas Statutes:

Finance Code, Chapter 33, Subchapter A, titled "Transfer of Ownership Interests," requires a person to apply for and obtain the Commissioner's approval before consummating a transaction that results in the person's acquisition of control of a Texas-chartered bank or a corporation or other entity that owns the voting securities of a Texas chartered-bank (State Bank or Bank).  Section 33.001(a) provides as follows:

Sec. 33.001.  Acquisition of Control. 

(a) Except as otherwise expressly permitted by this subtitle, without the prior written approval of the banking commissioner a person may not directly or indirectly acquire a legal or beneficial interest in voting securities of a state bank or a corporation or other entity owning voting securities of a state bank if, after the acquisition, the person would control the bank.

Finance Code, §31.002(a)(13), defines "control" as:

(A)  the ownership of or ability or power to vote, directly, acting through one or more other persons, or otherwise indirectly, 25 percent or more of the outstanding shares of a class of voting securities of a bank or other company;

(B)  the ability to control the election of a majority of the board of a bank or other company;

(C)  the power to exercise, directly or indirectly, a controlling influence over the management of policies of the bank or other company as determined by the banking commissioner . . .; or

(D)  the conditioning of the transfer of 25 percent or more of the outstanding shares or participation shares of a class of voting securities of a bank or other company on the transfer of 25 percent or more of the outstanding shares of a class of voting securities of another bank or other company.

Finance Code, §33.001(b), modifies the Finance Code, §31.002(a)(13)(A), definition of "control" for purposes of the prior approval requirements by providing as follows:

(b)  For purposes of this subchapter and except as otherwise provided by rules adopted under this subtitle, the principal shareholder or principal participant of a state bank that directly or indirectly owns or has the power to vote a greater percentage of voting securities of the bank than any other shareholder or participant is considered to control the bank.

A person who owns or has the ability or power to vote, directly or indirectly, at least 10 percent of the Bank's outstanding stock is considered to be a "principal shareholder."1

In summary, an acquisition transaction triggers §33.001(a) if, as a result of the acquisition, a person has the ability or power to vote or effect the transfer of 25 percent or more of the outstanding shares of a voting class of a State Bank's stock, the ability to control a majority of a Bank's board of directors, or the ability to exercise controlling influence over a Bank's policies.  Finance Code, Section 33.001(a), is also invoked if, as a result of the acquisition, a person who directly or indirectly owns or has the ability or power to vote at least 10 percent of a class of a State Bank's outstanding stock owns or has the power to vote a greater percentage than any other shareholder.  If any one of these circumstances would exist after the acquisition transaction, prior approval of the proposed transaction must be obtained unless the transaction is exempt under Finance Code, §33.005.  Finance Code, §33.005(5), authorizes the Commissioner to exempt a transaction from Finance Code, §33.001, if he finds that the transaction is not within the purposes of Subchapter A or that the regulation of the transaction is not necessary or appropriate to achieve the subchapter's objectives.

Discussion:

In your 17-page letter, you argue that the proposed investments of an individual Fund should not be aggregated with those of another Fund for purposes of Finance Code, §33.001.  If the Department disagrees and determines that the investments should be aggregated, you argue that the resulting "total" of aggregated investments should not be considered to constitute "control" for purposes of triggering the statute's prior approval requirement.  To support your position, you first describe [***] and the Funds and explain their organization, management and nature.  You then identify a number of restrictions imposed upon [***] and the Funds by federal statute and rule and, further, detail the commitments made by [***] and the Funds to Fed in the Fed Agreement.2  You assert that the foregoing effectively prevents [***] or the Funds from acquiring or effecting the type of "control" contemplated by Finance Code, §33.001.

Basically, you advise that [***] and its affiliates manage a number of investment companies organized as mutual funds.  The companies, known collectively as [The *** Funds], invest in equity securities. [The *** Funds] include approximately 150 companies that comprise the [*** Name Funds], and also a limited number of funds sponsored by third parties that hire [***] to serve as investment advisor, the Subadvised Funds. [***] and its affiliates also manage or sponsor certain other accounts and funds that invest in equity securities, the Managed Accounts.  The [*** Funds] and the Managed Accounts are referred to in this Opinion as "Fund" or "Funds" unless the context indicates otherwise.

You state that the Funds include among their investments the equity securities of banks and bank holding companies, including State Banks.  Because of concerns regarding statutory change of control requirements imposed both by federal and state law, [***] aggregates the Funds' holdings in a particular bank and limits the aggregated holdings to 10 percent of any class of the bank's outstanding voting securities.  If the holdings must be aggregated, [***] and the Funds wish to increase the "cap" to 15 percent and seek the Department's agreement that to do so with respect to a State Bank will not trigger the "control" provisions of Finance Code, §33.001.

You first argue that the individual Funds' holdings in a State Bank should not be aggregated for purposes of Finance Code, §33.001, because of the Funds' organization and management.  You represent that, although [***] serves as the investment advisor for all the Funds, each Fund has a separate legal existence and its own distinct shareholder base.  Each has its own investment policies and objectives, and individual strategies to comply with and achieve those objectives and strategies.  Moreover, each Fund has its own portfolio manager, who manages the Fund and makes decisions to buy or sell portfolio securities in accordance with the specific Fund's investment policies, objectives and strategies, and in a manner consistent with the fiduciary duty he or she owes the Fund.

You also argue that the nature of the Funds and their investments mitigates against a presumption of control for purposes of Finance Code, §33.001.  Your letter states that the management and investment decisions for each Fund are predicated upon the Fund's acting as a passive investor.  Investment decisions are not made for the purpose of obtaining control over or influencing a portfolio company's management or policy, but to further the Fund's specific policies and objectives, and to realize the best return consistent with those policies and objectives.  You detail provisions of the Investment Company Act of 1940 relating to joint transactions and transactions with affiliates and the rules adopted thereunder by the Securities Exchange Commission that you assert require Fund diversification and prohibit or discourage registered investment companies such as the Funds from seeking to control or influence the management of the portfolio companies.3

You concede that, as a general rule, [***] votes individual Fund holdings in portfolio company stock, that many of the Funds' boards of directors have common membership, and that [***] hires and supervises individual Fund managers.  However, you contend that the decentralized organization and management of the Funds, the passive nature of the Funds and their investments, and the constraints imposed by the referenced federal law outweigh these factors for purposes of analysis under Finance Code, §33.001, especially when coupled with the commitments and restrictions to which [***] and the Funds have agreed as reflected in the Fed Agreement.  The Fed Agreement incorporates certain organizational restrictions that apply whenever the Funds' aggregate holdings in a particular bank exceed 10 percent of any class or series of that bank's voting securities.  The restrictions include [***]´s commitment to cap the Funds' aggregated interests in any one bank at 15 percent of a class of the bank's voting securities, and to either vote shares in excess of 10 percent pursuant to a plan of "mirror" voting (whereby [***] will vote the excess shares in proportion to all other shares voted) or leave the shares unvoted.  The restrictions also include provisions to prevent [***] and the Funds from becoming involved in monitoring, supervising or otherwise influencing the policies, business decisions and/or management of such a bank.

Because [***], as the Funds' investment advisor, ultimately decides how to vote the shares held by individual Funds in a State Bank, the Department concludes that the Funds' holdings should be aggregated for purposes of Finance Code, §33.001, analysis.  As a result of aggregation, [***] and the Funds potentially come within the definitions of "control" set out in Finance Code, §31.002(a)(13)(A) and §33.001(b).  However, the Commissioner believes that a finding of "control" under Finance Code, §33.001, is not necessary to achieve the purposes and objectives of the statute, provided that [***] and the Funds adhere to their current policies and procedures and comply with applicable restrictions imposed by current federal law and rule and the commitments and restrictions contained in the Fed Agreement.4  Assuming these conditions are satisfied, the Funds may acquire, and their aggregated portfolios may hold, up to 15 percent of any class of outstanding voting securities of a State Bank without having to comply with the prior approval requirements of Finance Code, §33.001.  As required by 7 TAC §15.81(h), however, [***] and the Funds must submit to the Department a copy of any application required to be filed with any federal  regulatory authority.

The Commissioner declines to defer to the Fed with respect to clarifications of or modifications to the Fed Agreement. [***], on behalf of the Funds, must acknowledge to the Department in writing that it will notify the Department if the terms of the Fed Agreement are clarified or modified or any change occurs with respect to the laws, circumstances or facts set out in your letter of January 31, 2001.  In the event of such a clarification, modification or change, the Commissioner will reconsider his conclusion regarding the need to secure prior approval under Finance Code, §33.001.

The conclusion expressed in this letter is limited to the facts and circumstances set forth in your letter.  Different facts and circumstances may result in a different conclusion.

Opinion No. 02-03

A proposed loan will be aggregated under 7 TEX. ADMIN. CODE §12.9(g) with other loans to a borrower if the bank is relying on the borrower's guarantee and not primarily on the responsibility and financial condition of the obligor.

August 5, 2002

Robin Robinson, Assistant General Counsel

This letter is in response to your June 21, 2002 letter, on behalf of  [***] Bank (the "Bank"), in which you ask about the applicability of the legal lending limit provisions of the Texas Finance Code and related regulations to certain of the Bank's existing and proposed loans.

Question Presented:

You ask us to determine the effect of 7 TEX. ADM. CODE §12.9 as applied to two existing loans and three proposed loans, with respect to an individual customer ("Borrower").  The Borrower is a co borrower under and guarantor of the first existing loan and is the trustee of the trust borrower under and guarantor of the second existing loan.  The Borrower also controls each proposed borrower under the three proposed loans and proposes to guarantee each proposed loan.

Summary of Opinion:

Based on the facts as you have presented them, the first existing loan and one of the proposed loans must be attributed to the Borrower because the Borrower is or will be the expected source of repayment for each loan.  Another of the proposed loans will be aggregated with other loans to the Borrower for purposes of legal lending limit analysis because the Bank is relying on the guaranty of the Borrower rather than the creditworthiness of the primary obligor.

Facts:

You provided the following facts in your letter and supporting documents:

1.  Existing Loan One for $221,775 was made to the Borrower and another individual.  The Borrower is the primary source of repayment for the loan as well as guarantor of the loan.

2.  Existing Loan Two for $52,656 was made to a trust for the Borrower's mother (the "Trust").  The Borrower is the trustee for the Trust and guarantor of the loan.  You represent that the primary source of repayment for this loan is rental payments from tenants.

3.  Proposed Loan One for $1,084,000 is proposed to be made to a corporation that owns two commercial warehouses leased to non affiliated entities.  The Borrower owns 50% of the corporation and proposes to be guarantor of Proposed Loan One.  The purchase of the warehouses was financed by another bank and Proposed Loan One would refinance the prior notes and terminate the relationship between the corporation and the other bank.  The stated primary source of repayment for Proposed Loan One is lease income.  Two of five key points listed by the loan officer in recommending approval of this loan were:  (1) financial strength and creditworthiness of the guarantors, and (2) banking relationships of guarantors and related entities.  The corporation is a Subchapter S corporation and the shareholders have elected to withdraw all available cash flow from the corporation.  The corporation's December 31, 2001, balance sheet reflects a negative net worth of $166,164, based on $1,191,110 in total assets and $1,357,274 in total liabilities. 

4.  Proposed Loan Two for $455,000 is proposed to be made to a limited liability company ("LLC 1") that owns an office building and parking lot. The Borrower owns 75% of LLC 1, owns and manages the title company that is the office building's primary tenant, and proposes to be guarantor of the Proposed Loan Two. The purchase of the building and lot was financed by another bank and Proposed Loan Two would refinance the prior note and terminate the relationship between LLC 1 and the other bank.  The stated primary source of repayment for Proposed Loan Two is lease payments from the title company.

5.  Proposed Loan Three for $195,000 is proposed to be made to another limited liability company ("LLC 2") that currently is the obligor under a promissory note with another bank.  The Borrower is 50% owner of LLC 2 and proposes to be guarantor of Proposed Loan Three. Proposed Loan Three would refinance the existing note and terminate the relationship with the other bank.  LLC 2 is the owner of a wraparound note from [***, Inc.] for the purchase of real property.  The note will be collateral for Proposed Loan Three and it appears to be the only source of income for LLC 2.

6.  The Bank's legal lending limit is $500,000.

Discussion:

Under Texas Finance Code §34.201(a), absent the prior written approval of the Banking Commissioner, the total loans and extensions of credit by a state bank outstanding at any one time to a person may not exceed 25% of the lesser of the bank's capital and certified surplus or the bank's total equity capital.  The term "loans and extensions of credit" is defined in §31.002(a)(34) as "...direct or indirect advances of money by a state bank to a person that are conditioned on the obligation of the person to repay the money or that are repayable from specific property pledged by or on behalf of the person."  You ask about the effect of these provisions on the existing and proposed loans described in your letter.  Specifically, you ask whether the attribution and aggregation rules in 7 TEX. ADMIN. CODE §12.9 will cause the Bank to exceed the Texas Finance Code §34.201(a) legal lending limit with respect to these loans.

Under 7 TEX. ADMIN. CODE §12.9(a), a loan or extension of credit to one borrower is attributed to another person, and each person will be considered a borrower if:  (1) proceeds of the loan or extension of credit are to be used for the direct benefit of the other person, (2) a common enterprise is deemed to exist between the persons, or (3) the expected source of repayment for each loan or extension of credit is the same for each person.

Under 7 TEX. ADMIN. CODE §12.9(g), the derivative obligation of a guarantor will be aggregated with the direct loans or extensions of credit of such guarantor if the lending bank is not relying primarily on the creditworthiness of the primary obligor.  Specifically, an officer of the lending bank must certify in writing that the lending bank is, on stated facts, relying primarily on the responsibility and financial condition of the primary obligor for payment of the loans and not on the guarantor.

Based on the facts and information provided by you, we have determined that:

1.  Existing Loan One is the Borrower's direct obligation.  No analysis is required to conclude that the principal amount of $221,775 should be included in loans to the Borrower for purposes of applying the Bank's legal lending limit.

2.  Based on your representations, Existing Loan Two does not appear to be attributable to the Borrower.  However, the stated primary source of repayment on Existing Loan Two is rental payments from tenants.  We assume for purposes of this opinion that the tenants do not include the Borrower, the Borrower's dependents, or companies controlled by the Borrower to any material degree.  If this assumption is incorrect, Existing Loan Two of $52,656 may be attributable to the Borrower under 7 TEX. ADMIN. CODE §12.9(a)(3).  Further, we assume the loan file for Existing Loan Two will contain written documentation demonstrating that the Bank is reasonably relying on the creditworthiness of the Trust for repayment of the loan, and not on the Borrower's guaranty.  If this documentation does not exist, or if the Bank's reliance on the Trust for repayment of the loan is unreasonable in light of the stated facts, Existing Loan Two may be aggregated with other loans and extensions of credit to Borrower for purposes of applying the legal lending limit.

3.  Proposed Loan One for $1,084,000 would by itself exceed the Bank's legal lending limit of $500,000, as we assume you recognize.  The question at hand is whether the loan should be attributed to Borrower.  Based on the information you furnished, an examiner could reasonably conclude that Proposed Loan One should be aggregated with other loans to the Borrower under 7 TEX. ADMIN. CODE §12.9(g).  Bank records show that Bank is relying on the guaranty of Borrower to make Proposed Loan One.  The insolvency of the proposed primary obligor also suggests that Proposed Loan One would not be made but for the Borrower's guaranty.  No other controverting information was provided, such as certification by a Bank officer and supporting evidence demonstrating that the Bank is relying primarily on the responsibility and financial condition of the corporation for payment of the loan and not on the guaranty of Borrower. 

4.  Proposed Loan Two for $455,000 would likely be attributable to the Borrower under 7 TEX. ADMIN. CODE §12.9(a)(3), because the Borrower appears to be the primary source of repayment on Proposed Loan Two. The Borrower owns and manages the title company that is the principal tenant of the office building, and title company lease payments to LLC 1, the primary obligor, would appear to constitute the primary source of repayment for Proposed Loan Two.

5.  We have insufficient information to conclude that Proposed Loan Three for $195,000 would be attributable to Borrower.  However, Proposed Loan Three would be attributable to Borrower under 7 TEX. ADMIN. CODE §12.9(a)(3) if the relationship between Borrower and [***, Inc.] would make Borrower the primary source of repayment on the real estate note.  Further, if an examiner determines that the Bank did not make the loan relying primarily on the creditworthiness of LLC 2, the primary obligor, but instead made the loan in reliance on Borrower's guaranty, Proposed Loan Three would be aggregated with other loans and extensions of credit to Borrower for purpose of applying the legal lending limit.

Conclusion:

Based solely on your letter of June 21, 2002, and accompanying information, we conclude that the Trust and LLC 2, borrower and proposed borrower under Existing Loan Two and Proposed Loan Three, would likely be viewed as independent of Borrower for purposes of applying the legal lending limits of Texas Finance Code §34.201(a).  Conversely, Existing Loan One, Proposed Loan One, and Proposed Loan Two would likely be included as loans or extensions of credit to Borrower for legal lending limit purposes.

Our conclusion should not be construed as an endorsement of any proposed loan.  A bank must heed the underlying purpose of the legal lending limit, reduction of risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of the state bank's funds.  Further, while a bank may be empowered to make loans as described in this opinion that collectively aggregate more than the bank's legal lending limit, the bank in question must have the ability, capacity, and commitment to appropriately evaluate and manage the risks inherent in such lending activities.  Thus, these types of loans will be closely scrutinized by an examiner to monitor the bank's adherence to its policies and procedures and to ensure that the bank is administering such loans in a manner that is consistent with safe and sound banking practices.

This opinion is limited to the facts and circumstances set forth in your letter of June 21, 2002, and accompanying information.  Any change in those facts, circumstances, or the stated assumptions underlying our opinion may result in a different opinion.

Opinion No. 02-01

Loans under Lessor's leasing program as proposed will be aggregated to Lessor and not considered loans to lessees because Lessor will control lessee relationships with Bank. Specifically, loan payments will be handled by Lessor and not made directly to Bank by lessees as required by 7 TAC §12.7(b)(5). Further, Lessor's negotiation and control of the lease payments extend beyond the activities permitted for a servicing agent.

February 14, 2002

Robin Robinson, Assistant General Counsel

This opinion is in response to your January 3, 2002 opinion request concerning whether loans from [a Texas state bank (Bank)] to [ABC] Leasing, Inc. (Lessor) will be considered loans to the lessees under 7 TAC §12.7(b).

Summary of Opinion:

A loan to fund leases of person property through a leasing company is not considered a loan to a lessee if the leasing company receives the lease payments, deposits or otherwise negotiates the payment checks, deducts expenses from these funds, and then forwards the remaining amount to the Bank, because this arrangement does not meet the requirements of 7 TAC §12.7(b)(5) that lease payments must be paid by the lessee directly to the Bank. Further, Lessor's negotiation and control of the lease payments extend beyond the activities permitted for a servicing agent.

Facts:

Lessor proposes to offer its leasing program to Texas state-chartered banks. Under the program, participating banks perform an initial credit review and approve the extension of credit to an equipment lessee. Lessor works with the Bank to confirm the leasing transaction, the price and vendor for the equipment, and other pertinent details relating to the lease. Lessor also prepares the lease and other typical leasing documents that are executed by the Bank and lessee. The Bank sells the lease equipment and assigns the rights under the lease to Lessor. In turn, Lessor provides a non-recourse promissory note to the bank secured by the equipment and reassigns the lease to the Bank.

In the January 3, 2002 opinion request, payments on the note and lease are described as follows: "The monthly payments are made to a lock box for [Lessor], which deducts the monthly tax and remits the remaining payment to the Bank, which is applied as a reduction of the note and as payment of the Lease." We asked for additional information on this payment arrangement. On January 17, 2002, Lessor responded as follows:

In connection with the execution of the leasing documents, [Lessor] receives the express authorization of the Bank to act as servicing agent with respect to lease payments made payable to the Bank by the Lessee and transmitted to a lock box administered by [Servicing Bank] on behalf of [Lessor]. [Lessor] accepts such payments as servicing agent for the Bank, and transmits the Bank's portion of the payment to the Bank immediately, within one (1) business day of receipt. A portion of each payment is retained by [Lessor] for payment of taxes directly to the relevant taxing authority.

An ancillary issue that you raised relates to the fact that the coupon book given to the Lessee calls for payments under the lease to be made to the Bank. Accordingly, the actual instrument by which the payment is made is made payable to the Bank rather than [Lessor]. However, under the agreement that will be entered into between [Lessor] and each Bank, providing for [Lessor's] role as the servicer, the Bank will agree to and confirm that [Lessor] in the course of processing and servicing the leases, and collecting payments on them, may deposit, endorse, and otherwise deal with the check that is payable to the Bank.

Discussion:

Under 7 TAC §12.7(b), a loan to a leasing company for the purpose of purchasing equipment for lease is considered a loan to the lessee if the following conditions are met:

(1)  the bank documents the basis for its reliance on the lessee as the primary source of repayment before the loan is extended to the leasing corporation,

(2)  the loan is without recourse to the leasing corporation,

(3)  the bank receives a security interest in the equipment and, in the event of default, may proceed directly against the equipment and the lessee for any deficiency resulting from the sale of the equipment,

(4)  the leasing corporation assigns all of its rights under the lease to the bank,

(5)  the lessee's payments are assigned and paid to the bank directly by the lessee, and

(6)  the lease terms are subject to the same limitations that would apply to a state bank acting as a lessor under the Finance Code §34.204.

Lessor's program does not satisfy the condition in subsection (b)(5). Lessor receives the lease payments, deposits or otherwise negotiates the payments, deducts expenses from the resulting funds, and then forwards its own payment to the bank for the remaining funds, which is not a direct payment from the lessee to the Bank as the provision requires.

If subsection (b)(5) were otherwise met, the opinion request raises the issue of whether a leasing company could act as servicing agent for the Bank. As demonstrated in the cited OCC interpretive letter,1 this is permissible when the activities of the leasing company are limited to collecting lease payments and submitting them to the Bank. Lessor's negotiation and control of lease payments are beyond these permitted activities and present the same safety and soundness concerns that disqualified consideration of the bank loans as loans to the lessees under 7 TAC §12.7(b)(5).

The remaining conditions in 7 TAC §12.7(b) appear to be satisfied under Lessor's program. Therefore, Lessor could restructure its lease payment arrangement to avoid being characterized as the borrower. An acceptable payment arrangement would require lessees to make payments directly to the Bank and send payments directly to the Bank or to a servicing agent whose activities are limited, as discussed. The Servicing Bank could act as the servicing agent.

Conclusion:

Loans under Lessor's leasing program will not be considered loans to lessees because the loan payments are not paid by lessees directly to the Bank as required by 7 TAC §12.7(b)(5).

Opinion No. 01-14

December 20, 2001

Randall S. James, Commissioner, Texas Department of Banking

Leslie Pettijohn, Commissioner, Office of Consumer Credit Commissioner

James L. Pledger, Commissioner, Texas Savings & Loan Department

Harold E. Feeney, Commissioner, Texas Credit Union Department

By letter to Everette D. Jobe, General Counsel of the Texas Department of Banking dated October 3, 2001, you asked whether it is permissible to modify, rather than refinance, a home equity loan to reduce the interest rate and change the payments accordingly.

Summary:

A lender may modify a home equity loan by reducing its interest rate and changing the payment amounts and/or the number of monthly payments without going through all of the steps of a loan refinancing.  The lender and a borrower may agree to a modification at any time, even if it is within a year of closing this or another home equity loan secured by the same homestead.

May a home equity loan be modified?

A loan modification is a transaction where an existing note is modified, but the note is not cancelled.  In a modification, a lender and a borrower may agree to extend the term of the loan, change the interest rate, change the monthly payments, etc.  If the existing note is cancelled and a new note is signed to replace it, the transaction is generally considered a loan refinance.  The permissibility of refinancing of home equity loans is discussed in the Regulatory Commentary on Equity Lending Procedures (October 7, 1998), jointly issued by the below-signed state regulatory agencies.

Section 50(a)(6) does not specifically allow or even mention modifications of home equity loans.  Elsewhere, the constitution provides that a refinance secured by the homestead, any portion of which is a home equity loan, may not be secured by a valid lien against the homestead unless the refinance of the debt is a home equity loan.1  Thus, while the framers of these provisions of the constitution did include restrictions on refinancing a home equity loan, the constitutional provisions on home equity loans are silent on the application of common mortgage industry practices, such as modifications.

Inherent in an issue as complex as home equity lending are details that simply cannot be fully addressed within the text of the constitutional amendment.  Different statutes and constitutional provisions govern the various aspects of credit transactions, specifically loans, including home equity loans.  The home equity lending constitutional amendment and other laws affecting mortgage lending, particularly the Texas Finance Code, are separate and distinct layers of regulation, which may all, to some degree, apply to one or more aspects of a home equity loan.  In reviewing home equity lending, these agencies must consider and administer all of these laws, as applicable, and not merely any one distinct layer.  Section 50 addresses the elements necessary to create a valid lien on a homestead and the consumer protections the framers deemed necessary.  Some of these protections may limit the ability of a lender to do things otherwise permissible in the context of a home loan that is not a home equity loan.  To the extent that the provisions of the constitution can be reconciled with provisions of other Texas law applicable to mortgage lending, home equity lending will be governed by both.

A first or secondary home equity loan may be modified provided the modification is not contrary to any of the express requirements of the constitution.  For instance, the loan may not be modified to give the lender recourse for personal liability against any owner or the spouse of any owner.  A modification to increase the principal amount advanced would be prohibited because it would have the effect of turning the home equity loan into a line of credit, which is expressly prohibited.  These are examples, and there may be other instances where terms of a modification would be in conflict with the constitution.

A lender may unilaterally modify a home equity loan to comply with a legal requirement, but if an owner rejects the modification, the borrower has the right to pay off the existing balance of the loan at the rate and over the time period in effect prior to the proposed modification.  The lender may not accelerate the loan solely on the basis of the rejection of the modification.

This opinion does not address the appropriateness of charging fees associated with a modification.

May a home equity loan be modified within one year of its anniversary date?

a home equity loan be modified within one year of its anniversary date?A home equity loan in Texas must "not be closed before the first anniversary of the closing date of any other home equity loan secured by the same homestead property" Tex. Const. art. XVI, §50(a)(6)(M)(ii).  Does this provision prohibit modifying a home equity loan prior to its one-year anniversary date?

The constitutional amendment requires that an equity loan may not be closed before the first anniversary of the closing date of any other equity loan secured by the same homestead property.  This provision requires that a refinancing of an equity loan may not be closed before one year has elapsed since the closing date of any other equity loan secured by the same homestead property.  However, because modification of a home equity loan does not involve a closing and is legally different from a refinancing, a home equity loan may be modified before the first anniversary of the closing date of any other equity loan secured by the same homestead property.

The constitutional amendment requires that an equity loan may not be closed before the first anniversary of the closing date of any other equity loan secured by the same homestead property.  This provision requires that a refinancing of an equity loan may not be closed before one year has elapsed since the closing date of any other equity loan secured by the same homestead property.  However, because modification of a home equity loan does not involve a closing and is legally different from a refinancing, a home equity loan may be modified before the first anniversary of the closing date of any other equity loan secured by the same homestead property.

How does the requirement of substantially equal successive monthly installments affect modification?

A home equity loan must be scheduled "to be repaid in substantially equal successive monthly installments¼each of which equals or exceeds the amount of accrued interest as of the date of the scheduled installment." Tex. Const. art. XVI, §50(a)(6)(L).  However, in modifying a home equity loan, a lender may find it difficult to keep the monthly installments "substantially equal" to the loan's original monthly installments.  In fact, a modified home equity loan with monthly installments substantially the same as originally contracted would likely circumvent the purposes and objectives of the Soldier's and Sailors Civil Relief Act of 1940 (the "SSCRA").

Because variable rate loans, which often have changing installments, are specifically permitted under subsection (a)(6)(O), the framers and ratifiers apparently intended to allow reasonable variation from subsection (a)(6)(L) in limited situations.  The below-signed regulators agree that a mutually agreed upon loan modification resulting in substantially equal post-modification monthly installments that differ from the pre-modification monthly installments would be acceptable.

Authority of Responding Agencies

Because the constitutional provision2 for home equity lending provides no mechanism for agency interpretation, no state agency has authority to interpret it.  This letter is not, therefore, an interpretation but a statement as to how the four agencies issuing this letter would, absent judicial precedent to the contrary, view home equity loan modifications.

The consumer credit commissioner has the powers and performs all duties relating to the issuance of a license under Finance Code, Title, 4, Subtitle B and is responsible for the other administration of the subtitle except as provided by this Finance Code Chapter 341, Subchapter B.3  The banking commissioner has enforcement authority relating to the regulation of a state bank operating under Finance Code, Title 4, Subtitle B.4  Likewise, the savings and loan commissioner has enforcement authority relating to the regulation of state savings associations and state savings banks operating under Finance Code, Title 4, Subtitle B,5 and the credit union commissioner has enforcement authority relating to the regulation of state credit unions operating under Finance Code, Title 4, Subtitle B.6  The Comptroller of the Currency, the Office of Thrift Supervision, and the Supervisor of Federally Chartered Credit Unions may enforce Finance Code, Title 4, Subtitle B, relating respectively to the regulation of national banks,7 federal credit savings associations,8 and federal credit unions9 operating under Subtitle B.

The below-signed state regulatory agencies believe it is important to provide this guidance with respect to home equity loans to facilitate regulated lenders and investor's efforts, consistent with the intent of the Legislature, to meet the need of Texas consumers.  This guidance is particularly momentous during this time when, pursuant to the SSCRA,10 lenders may need to modify the rates on home equity loans to persons called to active military duty.11

The position on loan modification presented in this letter is the opinion of each of the state administrative agencies responsible for regulating certain entities making these loans.  Lenders must be aware however that a court may or may not defer to this letter in resolving a dispute between a borrower and a lender.

Opinion No. 01-12

Robin Robinson, Assistant General Counsel

August 10, 2001

A bank may accept 12b-1 fees in connection with investment of trust assets in the related mutual funds if the compensation is disclosed.

In your June 15, 2001 letter, you seek our opinion whether [Bank] may accept 12b-1 fees in connection with investment of trust assets in the related mutual funds. Bank may accept the 12b-1 fees if it discloses the compensation.

Background

The Securities and Exchange Commission issued Rule 12b-1 (12 C.F.R. §270.12b-1) pursuant to 12(b) of the Investment Company Act of 1940 (15 U.S.C. §80a-1, et seq.). The rule permits electing mutual funds (12b-1 funds) to use fund assets to sell or distribute fund shares and to compensate third parties in connection with the sale or distribution. Some bank fiduciaries invest trust assets in 12b-1 funds and receive 12b-1 "service" fees from the funds. The 12b-1 fees are generally calculated as a percentage of the amount of trust assets invested by the bank in the 12b-1 fund.

From time to time, Bank determines that the most appropriate investment for particular trust funds is a 12b-1 fund and it receives 12b-1 fees without correspondingly reducing its trust account compensation. Bank seeks an opinion on whether this is permissible. For the purpose of making this determination, Bank acknowledged its exacting fiduciary duty to make decisions concerning the investment of trust assets based exclusively on what is in the best interest of its trust customers. Bank also represented that it will acquit itself of this fiduciary duty fully, completely, and carefully and that it will always follow the exact terms of the governing instrument of the trust, the applicable law, and the prudent investor rule.

If we conclude that Bank's acceptance of the 12b-1 fees is permissible, Bank asks the following questions: (1) what are the disclosure requirements? and (2) can Bank use the 12b-1 fees it receives to pay for services that benefit trust clients?

Discussion

A conflict arises when a trustee accepts 12b-1 fees in connection with investment of trust assets in related mutual funds because the compensation has the potential to induce the trustee to invest in a 12b-1 fund even if better or more suitable investments are readily available in the marketplace. Nevertheless, the practice is specifically authorized in Texas Property Code §113.053(g) if the compensation is disclosed. This statutory authorization, however, is subject to the trustee's fiduciary duty to appropriately manage the resulting conflict by applying a heightened level of scrutiny to determine whether investment in a 12b-1 fund best meets the purpose of the investing trust. Bank represented that it unqualifiedly fulfills this heightened level of responsibility. Therefore, we do not further address the issue in this discussion.

As to Bank's question on what disclosure is required for accepting 12b-1 fees, we believe initial disclosure should be made through authorization in governing instruments. We further believe that disclosure must be made in at least annual account statements showing the fees as a separate line item stated in dollars and cents and the total amount of fees attributed to the account since the previous statement.

Finally, if 12b-1 fees are authorized and appropriate, the fees charged become Bank property and may be used for any legitimate business expense, whether or not it is trust related.

Conclusion

Bank may accept 12b-1 fees in connection with investment of trust assets in related mutual funds if it discloses the compensation. This conclusion is based on the facts and representations in Bank's June 15, 2001 letter. Any change in those underlying facts or representations may result in a different opinion.

Opinion No. 01-10

A loan to a public junior college is exempt from the legal lending limit if it is a legally created general obligation of the public junior college and the lending bank has obtained an opinion of counsel that the loan or extension of credit is a valid and enforceable general obligation of the college.

July 13, 2001

Steve Martin, Assistant General Counsel

By letter dated June 5, 2001, you requested our opinion as to whether a loan or extension of credit to a public junior college is exempt from the legal lending limit.  As discussed more fully below, a public junior college is exempt from the legal lending limit if the loan or extension of credit is a legally created general obligation of the public junior college and the lending bank has obtained an opinion of counsel that the loan or extension of credit is a valid and enforceable general obligation of the college.

Facts

You state that a Personal Property Finance Contract ("PPFC") currently exists between [***] Junior College ("College") and [Bank].  College is a public junior college located in [***], Texas.  Bank regularly provides banking services for College.  You state that a credit facility of the size of the PPFC , if considered part of the legal lending limit, would severely impact the availability of credit to College.  Consequently you seek our opinion on whether the PPFC is covered by, or exempt from, the legal lending limit requirement.

Analysis

Pursuant to §34.201(a) of the Texas Finance Code, the total loans and extensions of credit outstanding at any time by a state bank may not exceed 25% of the bank's capital and certified surplus.1  You have suggested in your letter that your inquiry is resolved by Finance Code §34.201(a)(8) which provides an exemption from the legal lending limit for "the portion of an indebtedness that this state, an agency or political subdivision of this state, the United States, or an instrumentality of the United States has unconditionally agreed to purchase, insure, or guarantee."  However, §34.201(a)(8) does not apply to direct loans to a governmental entity.2  The Department of Banking has issued several opinions discussing the application of this section. See e.g. Opinion No. 99-40 (January 19, 2000).

The issue in this case, however, is addressed by 7 TAC §12.6(c), which provides an exemption from the legal lending limit for "a loan or extension of credit to this state or an agency or political subdivision of this state . . . to the extent the loan or extension of credit constitutes a legally created general obligation of the borrower, if the lending bank has obtained an opinion of counsel that the loan or extension of credit is a valid and enforceable general obligation of the borrower." 7 TAC §12.6(c).

To determine if the exemption created by 7 TAC §12.6(c) applies in the instant case, we look, first, to discern whether the loan or credit is extended to this state or an agency or political subdivision of this state and, second, whether the loan or extension of credit constitutes a legally created general obligation of the borrower and the lending bank has obtained an opinion of counsel that the loan or extension of credit is a valid and enforceable general obligation of the borrower.  College is a creature of state law with tax assessment and collection authority. Education Code §130.0011.  College is also funded with legislative appropriations from the Texas Legislature.  All indications point to College being a political subdivision of the State.

The loan must also be a legally created general obligation of the borrower.  A general obligation is payable from general revenue rather than from a special fund.  The PPFC provides that the final College budget of each fiscal year shall set aside and appropriate out of the limited tax and other revenues and funds lawfully available an amount sufficient to make payments for the PPFC.  The PPFC also provides that the College has levied and the College agrees to assess and collect a continuing and direct ad valorem tax at a rate from year to year sufficient together with revenues and funds lawfully available to the College to make payments for the PPFC. (PPFC §111.1, page 7.) Based on a review of the PPFC, it appears that the loan represents a general obligation of the College.  However, as noted above, 7 TAC §12.6(c) also requires an opinion from Bank's legal counsel to the effect that the loan or extension of credit is a valid and enforceable general obligation of the borrower.  Such a letter has not been presented in the instant case.  The bank would be required to have such an opinion letter in its possession in order to utilize the exemption from the legal lending limit provided by 7 TAC §12.6(c).

Conclusion

Subject to your representations, we conclude that a loan or extension of credit to a public junior college may be exempt from the legal lending limit under 7 TAC §12.6(c) if the loan or extension of credit is a legally created general obligation of the public junior college and the lending bank obtains an opinion of counsel that the loan or extension of credit is a valid and enforceable general obligation of the college.

Our conclusion should not be construed as an endorsement of the proposed loan.  A bank must heed the underlying purpose of the legal lending limit, reduction of risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of the state bank's funds.  Further, while a bank is clearly empowered to make loans as described in this opinion in an amount well in excess of the bank's legal lending limit, the bank in question must have the ability, capacity, and commitment to appropriately evaluate and manage the risks inherent in such lending activities.  Thus, these types of loans will be closely scrutinized by the Department of Banking examiners to monitor the bank's adherence to its policies and procedures and to ensure that the bank is administering such loans in a manner that is consistent with safe and sound banking practices.

Finally, this opinion is limited to the facts and circumstances set forth in your letter of June 5, 2001.  Any change in those facts, circumstances, or the stated assumptions underlying our opinion may result in a different opinion.

Opinion No. 01-09

Unless the account documentation for a self-directed IRA directly states that a trust is created or indirectly does so by, for example, referring to the custodian as trustee or the assets as trust property, the IRA custodial account is not a trust and the custodian is not a trustee under state law, although the custodian is subject to applicable Internal Revenue Code provisions relevant to conflicts of interest and prohibited transactions between account holders and trustees or custodians.

July 2, 2001

Everette D. Jobe, General Counsel

By letter dated April 10, 2000, you ask several questions regarding permissible activities of [****] Trust Company ("Trust Company") as custodian of a self-directed, individual retirement account ("IRA custodial account").  Your questions pose novel legal issues that we have not previously considered and our response has required extensive research and analysis.

You first ask whether Property Code §113.053 prohibits a trust company that acts as custodian of an IRA custodial account from selling, upon the account holder's specific instruction, an account asset to a trust company officer or director.  You also ask whether Property Code §113.054 prohibits the trust company from selling an asset in an IRA custodial account to another IRA custodial account for which the company serves as custodian if both the selling and purchasing IRA custodial account holders specifically direct the trust company to process the transaction.

Summary Response:

Property Code §§113.053 and 113.054 apply only to an express trust.  The custodian of a self-directed IRA is not the trustee of an express trust unless the account documentation directly states that a trust is created or indirectly does so by, for example, referring to the custodian as trustee or the assets as trust property.  Therefore, a custodian of a properly structured IRA custodial account may:

•  sell an IRA custodial account asset to an officer or director of the custodian upon the account holder's specific instruction, notwithstanding Property Code §113.053; and

•  sell an asset in one IRA custodial account to another IRA custodial account if both the selling and purchasing IRA custodial account holders specifically direct the custodian to process the transaction, notwithstanding Property Code §113.054.

However, the custodian is subject to applicable Internal Revenue Code provisions relevant to conflicts of interest and prohibited transactions between account holders and trustees or custodians.

Facts and Representations:

You explain that Trust Company serves as custodian of IRA custodial accounts.  As custodian, Trust Company invests account funds and sells account assets only upon and in accordance with the account holders' written instructions.  Trust Company does not make investment decisions or otherwise exercise any discretion with respect to the accounts.  Nor does Trust Company give investment advice or offer any investment products.  You emphasize that Trust Company acts only as custodian and does not serve as trustee of the accounts.1

You further advise that many IRA custodial account holders direct that funds in their accounts be used to purchase church bonds and that Trust Company makes the purchases upon receipt of the account holders' written instructions.2  Occasionally, an account holder advises Trust Company that he or she desires to sell an unmatured church bond.  Trust Company advises the account holder that Trust Company may not buy or sell the bond for its own account, but that, if the account holder finds a purchaser, Trust Company will sell the bond upon receipt of the account holder's written instructions.  At times, Trust Company gives information about the account holder's offer to sell to Trust Company officers and directors, who then purchase the bond in response to and upon the account holder's instructions to sell.  In other instances, the IRA custodial account holder arranges to sell the bond to another IRA custodial account for which Trust Company also acts as custodian.  The selling account holder directs Trust Company in writing to sell to a specific account holder at a specific price.  The purchasing account holder directs Trust Company in writing to purchase the specific bond at a specific price from a specific account holder.  Upon receipt of these written directions, Trust Company processes the transactions in accordance with their terms.  Your questions arise because the Department's trust examiners have questioned whether the Texas Trust Code permits these sales to an Trust Company officer or director or from one IRA custodial account to another.

Discussion:

A.  Statutory Analysis

Property Code, Title 9, Subtitle B, commonly referred to as the Texas Trust Code ("Trust Code"), governs the creation and administration of trusts in this state.  Sections 113.053 and 113.054, the statutes about which you ask, are included within the Trust Code and pertain to trustee conflicts of interest.  Section 113.053 generally prohibits a trustee from directly or indirectly buying or selling trust property from or to an employee, officer or director of the trustee.  Section 113.054 prohibits the trustee of one trust from selling trust property to another trust for which it also serves as trustee unless the property is an obligation issued or fully guaranteed by the United States government.  We note that if §113.053 and §113.054 do apply to the custodian of an IRA custodial account, only the §113.053 prohibition against the sale of an account asset to an employee, officer or director of the trustee is problematic.  Section 113.059(a) would permit an IRA custodial account holder, by means of a trust indenture provision, to remove the §113.054 restriction and authorize Trust Company to process the sale and purchase of account assets between different IRA custodial accounts for which Trust Company serves as custodian.  Section 113.059(b), however, explicitly provides that a corporate trustee may not be relieved of the §113.053 prohibitions against self-dealing.3

By its terms, the Trust Code applies only to an express trust.4  To answer your question, we must determine whether an IRA custodial account is an express trust to which the Trust Code, and, therefore, §113.053 and §113.054, apply.  Before addressing that question, however, we believe it helpful to examine the nature of an IRA.  Internal Revenue Code §4085 authorizes the establishment of and provides tax benefits for a variety of individual retirement arrangements intended to encourage and provide a means for individuals to plan and save for their retirement.  One such arrangement is the IRA, defined in Internal Revenue Code §408(a) as "a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries."  An IRA, which is established by written document and must satisfy certain statutory criteria,6 is basically a tax deferment savings plan.  The account holder contributes funds to his account for investment, and the income earned on account assets is not taxed until money is withdrawn after the account holder reaches a certain age, presumably when he is retired and may be in a lower income tax bracket.  The account is subject to the absolute control of the depositor who may, subject to penalties, terminate the account or make early withdrawals from it at will.

Many IRAs are referred to as "self-directed," meaning the depositor makes all the decisions with respect to the investment and disposition of account assets.  A self-directed IRA may be set up as either a trust or a custodial account.7  If the depositor establishes his or her self-directed IRA as a trust, the trustee receives the funds in trust and deposits, invests and distributes them according to the depositor/settlor's instructions.8  Many times the trustee also acts as the account custodian.  If the depositor establishes his self-directed IRA as a custodial account, the custodian acts as the depositor's bailee and agent.  As bailee, the custodian does not have legal title to the depositor's property, but rather has possession of and safekeeps the property under the custodial agreement.  As agent, the custodian is subject to the control of the principal; he collects and pays out the income earned on the account assets, and buys, sells, receives and delivers the assets when instructed to do so by the depositor.  Although the custodian owes a fiduciary duty to the principal with respect to matters within the scope of the agency, the relationship is not a trust.

Internal Revenue Code §408(a) provides that "the term 'individual retirement account' means a trust. . . ."  Internal Revenue Code §408(h), however, deals specifically with custodial accounts and provides that:

For purposes of this section, a custodial account shall be treated as a trust . . .  if the custodial account would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a).  For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.

The express language of §408(h) confines the treatment of a custodial account as a trust, and the custodian as a trustee, to Internal Revenue Code §408.  Section 408(h) thus evidences Congress' recognition that, although a custodial account will be treated as a trust in order to qualify as an IRA under §408(a) and receive the statute's tax benefits, a custodial IRA does not necessarily constitute a trust for any purpose other than income tax purposes.9

We do not believe that the characterization and treatment of an IRA custodial account as a trust for income tax purposes compels the conclusion that such an account is a trust under Texas law.  The provisions of the Texas Trust Code, not the Internal Revenue Code, determine whether an IRA custodial account is a trust.

As stated previously, the Trust Code applies only to express trusts.  Trust Code §111.004(4) defines an "express trust" as:

A fiduciary relationship with respect to property which arises as a manifestation by the settlor of an intention to create the relationship and which subjects the person holding title to the property to equitable duties to deal with the property for the benefit of another person.

This definition establishes certain elements that must be present for the creation of an express trust.  First, the settlor must demonstrate that he intends to create a trust — that he intends the trust property to be held in trust for his benefit or that of another, and that he intends the legal title to the trust property to pass to the trustee.  Trust Code §112.002 specifically states that "a trust is created only if the settlor manifests an intention to create a trust."  Thus, the settlor's intent ultimately determines whether a transaction creates a trust.  Without a showing of the requisite intent, an express trust simply does not exist.10  Although no particular words are necessary, the settlor's intent must be sufficiently expressed and shown with reasonable certainty, generally through an explicit declaration of trust in the attendant documents.11  Other elements ordinarily required for the establishment of an express trust include the settlor's transfer of the legal and equitable ownership of the trust property.  Legal title must immediately pass to the trustee, and the beneficial or equitable title to the beneficiary.12

We have reviewed the self-directed IRA custodial account application and other account-related documents you have submitted and considered your representations concerning the activities undertaken by Trust Company in connection with IRA custodial accounts for which Trust Company serves as custodian.  Applying the requirements discussed above, we conclude that the IRA custodial accounts lack the requisite elements to constitute express trusts under Texas law.  Nothing in the account documentation we reviewed suggests, directly or indirectly, that the account holder, the person who established the custodial account, intends to establish a trust.  The documents refer to Trust Company as "custodian", the account holder as "depositor", and the account as a "custodial" account.  Moreover, to establish the accounts, Trust Company and the depositor utilized IRS Form 5305-A, the custodial form, rather than IRS Form 5305, the trustee form.  Additionally, Trust Company has no legal or equitable ownership interest in or right to the IRA custodial account assets; if it holds "title" to the assets at all, it does so only as the account holder's nominee.  The requisite transfer of legal title to a trustee is thus absent.13

Based upon the foregoing, we conclude that deposits into the self-directed IRA custodial accounts do not constitute trust property and that Trust Company, as custodian, is not a trustee.  The arrangement is not an "express trust" within the meaning of the Trust Code.14  As a matter of state law, the IRA custodial accounts instead appear to simply be custodial agency accounts in which Trust Company, as bailee, has the obligation to preserve and safekeep the property entrusted to the company by its principal, the IRA custodial account holder, and to deal with that property in accordance with the account holder's instructions and the terms of the custodial agreement.  As agent, Trust Company's actions are directed and controlled by the account holder through the terms of the contract and Trust Company performs no acts that are not specifically required and authorized by the agreement.15

B.  Texas Cases

In reaching our conclusion, we have reviewed Texas cases that address the substantive nature of an IRA.  We have found no case that specifically considers whether a self-directed IRA established strictly as a custodial account is an express trust under the Trust Code.  Several Texas cases do, however, consider self-directed IRAs set up as trusts where the trustee also serves as custodian.  In Lee v. Guitierrez,16 IRA depositors with accounts at a defunct savings and loan association contended that the funds in their IRA accounts were trust funds under Texas law, and claimed priority over the association's general depositors upon the institution's liquidation.  The court recognized that the IRA was a trust under the Internal Revenue Code, but characterized it as a "unique" trust — the depositor who created it was both the settlor and primary beneficiary, and he, not the trustee, had the authority to decide how the account assets were to be invested.  The court analogized the IRA account to a safe deposit box, and the account assets to the box's contents, and concluded that the assets were not held in trust and that the IRA account holders were therefore not entitled to the claimed status of trust beneficiaries.

In Colvin v. Alta Mesa Resources, Inc.,17 an IRA account holder argued that he could not legally assign his interest in the account assets because the IRA was a "true" trust in which he merely had a beneficial interest; only the trustee bank, as owner of the legal title, had the authority to assign the account assets.  The court rejected the account holder's argument, noting the unique nature of an IRA and repeating the Lee court's "safe deposit box/contents" analogy.  The court held that the IRA depositor owned the assets in his account and could therefore assign those assets without the consent of the trustee bank.

We do not believe that Lee or Colvin should be read to mean that a self-directed IRA set up strictly as a custodial account constitutes an express trust under Texas law, or transforms the custodian into a trustee and the account assets into trust funds.  Indeed, we believe the courts' holdings, and their use of the safe deposit box analogy, support our conclusion that the custodial accounts in question are simply bailments coupled with an agency.

C.  Cases from Other Jurisdictions

In addition to researching Texas case law, we have reviewed cases from other jurisdictions.  Courts in several jurisdictions have analyzed custodial accounts as we have and concluded that a self-directed custodial IRA, although treated as a trust for federal income tax purposes, is not a trust for other purposes because the account does not satisfy state law requirements relating to the establishment of a trust.18  These courts emphasize the absence of any manifestation, either through conduct or the documents creating the account, that the person establishing the account intends to create a trust.  They also cite the fact that the custodian has no interest in the account assets and that the transfer and separation of titles required for the creation of a trust is therefore missing.

Admittedly, courts in several other jurisdictions have reached a contrary conclusion and have found that an IRA is a trust;19 however, only a few of those cases dealt with an explicitly custodial arrangement.  The cases have generally arisen in the context of a bankruptcy proceeding and/or have involved an attempt by a custodian bank to set off IRA account assets against a general indebtedness owed by the IRA account holder, an action courts have found impermissible for a variety of reasons.  We find these cases either distinguishable, unpersuasive, or actually supportive of our conclusion.  In those cases in which the court has concluded that a custodial account is a trust and therefore not subject to offset or creditors' claims, reliance has been placed upon the language of 408(a) that an IRA is a trust, as well as the section's provision that an account holder's interest in the account is nonforfeitable.  Generally, no issue has been raised as to whether the account is a trust or whether the trustee holds legal title to the account assets.  In cases in which the nature of an IRA as a "true" trust has been an issue, the courts have found a trust to exist because the documents establishing the custodial account refer to "trust", "trustee", "trust assets" and "trust investments".

D.  Federal Banking Agencies

We further note that, although no federal banking regulatory agency appears to have addressed the issue directly, published regulatory materials of several agencies imply that they would concur in our conclusions.  For example, federally regulated financial institutions that engage in retail securities brokerage must comply with the guidelines established by the "Interagency Statement on Retail Sales of Nondeposit Investment Products," dated February 15, 1994 (Interagency Statement).20  The interagency statement establishes minimum operating standards for retail brokerage programs that help mitigate risks to both the financial institution and the consumer.  However, these standards generally do not apply to fiduciary accounts administered by a depository institution, primarily because fiduciary accounts are governed by other standards of care and prudence, but do apply to accounts where the customer directs investments, such as IRA custodial accounts.21

Conclusion:

To summarize, we conclude that the IRA custodial accounts for which Trust Company serves as custodian are not express trusts under the Trust Code and are therefore not subject to §113.053 or §113.054.  Accordingly, §113.053 does not prohibit Trust Company, as custodian of such accounts, from selling, upon the account holder's specific instruction, an account asset to a trust company officer or director.  Nor does §113.054 prohibit Trust Company from selling an asset in one IRA custodial account to another IRA custodial account if both the selling and purchasing IRA custodial account holders specifically direct Trust Company to process the transaction.

We caution, however, that in our opinion the transactions in question carry substantial potential for abuse, particularly since no viable or established secondary market exists for IRA custodial account holders who wish or need to sell their church bonds prior to maturity.  It is therefore essential that Trust Company strictly adhere to the policies and procedures set out in your letter in connection with these sales and purchases.  We also caution that, even though the self-directed IRA custodial accounts are not trust accounts and Trust Company is not a trustee for purposes of state law under the Trust Code, Trust Company is treated as a trustee for purposes of Section 408 of the Internal Revenue Code.  As such, Trust Company is subject to applicable Internal Revenue Code provisions relevant to conflicts of interest and prohibited transactions between account holders and trustees or custodians.  Department examiners will continue to review Trust Company's activities for possible abuse.

Our determination is based upon the facts and circumstances set out in your correspondence with the Department and the specific terms of the Self-Directed IRA Custodial Agreement and other related documents submitted for our review.  Any change in those facts or circumstances, or in the terms of the Agreement, may result in a different conclusion.

Opinion No. 01-08

A state bank may purchase an insurance policy that covers repossession costs and any collection shortfall on a loan or lease that goes into default, subject to restrictions limiting pass-through of costs to consumer borrowers.

July 2, 2001

Everette D. Jobe, General Counsel

By letter dated March 16, 2001, you advise that your company, [****], Inc., serves as administrator for insurance programs insured by the [****] Group of Companies.  You state that a number of Texas financial institutions are interested in purchasing "default shortfall" insurance, and ask whether Texas banking law would prohibit them from doing so.

Summary Response:

A Texas state bank may purchase "default shortfall" insurance for its own benefit incidental to its express power to lend money.  However, a lender generally may not pass the cost for such insurance on to the borrower of a loan subject to Chapter 342, Finance Code (consumer loans).

Discussion:

You explain that "default shortfall" coverage protects a financial institution in the event a loan or lease for which it has provided financing goes into default.  The insurance covers the costs incurred by the institution to repossess the collateral securing the loan or lease and any "shortfall" on the balance owing after disposition of the collateral.1  My understanding, based on discussions between my staff and [***], an independent insurance agent who has an exclusive agreement with [****] for the sale of the product in Texas, is that a financial institution would purchase the insurance in connection with its financing of commercial and consumer loans and leases for the purchase or lease of personal automobiles, truck tractors and trailers, recreational vehicles and motorcycles.  I understand further from these discussions with Mr. [***], as reported to me, that you are interested only in whether a Texas financial institution may purchase default insurance for its own benefit, just as it might purchase liability or property insurance.

Finance Code §32.001(b)(1) authorizes a state bank to lend money and, further, to "exercise incidental powers as necessary to carry on the business of banking as provided by this subtitle."  Incidental to its express power to lend money, a state bank has the power to purchase insurance against certain risks it assumes in the exercise of its express powers.  We recognize the value of such insurance to the extent it relieves the bank of, among other costs and risks, the expense of repossession and the risk of loss in the event liquidation of the collateral fails to generate sufficient funds to pay off the remaining balance of the defaulted loan.  However, a state bank should only purchase insurance that is written at lawful rates, in accordance with the Texas Insurance Code, and by a company authorized to do business in Texas.

Although you do not ask whether a state bank may pass on the cost of insurance to borrowers, these questions are of interest to state banks that may be considering participating in a specific insurance program.  A state bank may, as a general matter, include the cost of insurance purchased for its own benefit as part of its operational overhead for purposes of calculating general loan fees.2  In addition to purchasing insurance for its own benefit, a state bank may, as a general matter, offer insurance to a borrower and charge a separate or identifiable fee or charge for the coverage.  As explained below, however, a state bank's authority to do so is limited with respect to certain consumer loans by relevant provisions of the Texas Credit Title, Finance Code §§301.001, et seq. (West Supp. 2001).

In general, the charges that may be assessed in connection with a consumer installment loan made by a state bank are governed by Finance Code Chapter 342.  Chapter 342 applies to a loan extended primarily for personal, family or household use for which the annual interest rate exceeds ten percent. Finance Code §342.004(a), §342.005.  Pursuant to Finance Code §342.502:

(a)  A lender may not directly or indirectly charge, contract for, or receive an amount that is not authorized under this chapter in connection with a loan to which this chapter applies, including any fee, compensation, bonus, commission, brokerage, discount, expense, and any other charge of any nature, whether or not listed by this subsection.

(b)  On a loan subject to Subchapter E3...a lender may assess and collect from the borrower an amount incurred by the lender for:

. . .

(6) a premium or an identifiable charge received in connection with the sale of insurance authorized under this chapter.

The types of insurance for which Chapter 342 authorizes a premium or identifiable charge are, depending upon the amount of the loan, hazard insurance on collateral securing the loan, credit life insurance, credit health and accident insurance, involuntary unemployment insurance, and non-filing insurance. Finance Code §§342.401, 342.402, 342.406.  "Default shortfall" insurance is not a type of insurance authorized under Chapter 342.4  Consequently, a state bank may not include the cost of such insurance in its overhead factor for general loan fees,5 or assess and collect a premium or identifiable charge for such insurance sold to the borrower, in connection with a loan subject to Chapter 342 — an installment loan made by the bank to a borrower primarily for personal, family or household use with an interest rate in excess of ten percent per year.6  A state bank may, however, under its incidental power, include the cost of such insurance in its overhead factor for general loan fees applicable to a commercial loan, or offer default shortfall insurance and charge a fee for the coverage on a commercial loan.7

In closing, we caution that a Texas state bank that offers and charges a fee to borrowers for default shortfall insurance must comply with all applicable federal and state laws and regulations, including the Texas Insurance Code and the regulations of the Texas Department of Insurance.

This letter does not constitute an endorsement of [****], Inc., the [****] Group of Companies, or any product or service offered by either.  Please feel free to call me if you have any questions or comments.

Opinion No. 01-07

June 15, 2001

Everette D. Jobe, General Counsel

A Texas bank, acting as agent for an out-of-state bank that does not have a Texas office, may not accept deposits through ATMs from customers of the out-of-state bank in a manner that implies or allows the inference that the funds have been deposited in the customer's insured account prior to the time the customer's bank actually receives the funds.

Although Opinion No. 01-07 stands for the proposition stated above, the opinion specifically addresses the proposal of an ATM operator to accept deposits for Internet banks through ATMs in Texas. A more precise statement of the specific opinion is as follows:

A Texas-licensed money transmitter is fully authorized to accept funds through an ATM it owns and operates in Texas  for transmission  to a customer's out-of-state bank that does not have a Texas office, but may not represent the receipt of funds at the ATM in such a manner as to imply or allow the inference that the funds have been deposited in the customer's bank prior to the time the bank actually receives the funds.  Retention of a bank in Texas as agent does not alter this conclusion.

By letter dated April 6, 2000, you asked for our concurrence that a proposed program to be offered through ATMs owned by [Company] is a permissible activity under Texas law.

Specifically [Company] proposes to utilize Texas depository institutions, as agents for other depository institutions, including those with no physical presence in Texas, to accept deposits on behalf of such depository institutions from their customers through [Company] ATMs.  For convenience, we will refer to depository institutions as "banks" although we acknowledge that participating depository institutions could include savings banks, savings and loan associations, and credit unions, in addition to commercial banks.

Summary of Response

Because the program you describe does not establish the existence of a deposit until the customer's funds are actually received by the customer's bank, [Company] is fully authorized as a Texas-licensed money transmitter to accept funds through an ATM in Texas for transmission to a customer's bank, but may not represent the receipt of funds at the ATM in such a manner as to imply or allow the inference that the funds have been deposited in the customer's bank prior to the time the bank actually receives the funds.

The Proposal

[Company] desires to permit participating banks to accept customer deposits at [Company] ATMs in Texas, with an emphasis on serving customers of Internet banks.  In recognition that [Company] is not itself authorized to accept deposits, [Company] proposes to facilitate an agency relationship between each participating bank and a Texas-based bank ("bank-agent") that will authorize the Texas bank-agent to nominally accept the funds for subsequent transfer to the customer's bank for deposit.  No depository relationship will be created between the customer and the Texas bank-agent, and the "deposit" will not be recognized and acknowledged by the customer's bank until the bank credits the customer's account upon actual receipt of the funds.

Discussion

As we understand the [Company] proposal, a Texas bank-agent will not necessarily be required.  As you have described the arrangement, the transaction is simply an undertaking to transmit money.  [Company] is fully authorized by its license under Finance Code Chapter 152 to transmit funds from a Texas customer to a designated third party, including the customer's bank.

However, we believe the [Company] proposal as currently described potentially violates other Texas laws, including the Texas Deceptive Trade Practices-Consumer Protection Act, Business and Commerce Code §§17.41 et seq.  The nature and insured status of funds accepted through a [Company] ATM for transmission to the customer's bank must not be misrepresented.  In our view, an advertisement or representation to customers of this program that funds submitted through an ATM have been "deposited" would be potentially misleading or deceptive.  Interposing a Texas bank-agent for [Company] as the money transmitter is insufficient to transform the transaction into a deposit.

Specifically, you indicate that no deposit relationship will be established by the customer with the Texas bank-agent, and the deposit will not be recognized by the customer's bank until the funds are actually received.  Although the time elapsed from receipt at the ATM to receipt by the customer's bank could be short if the funds are comprised of cash and the Texas bank-agent performs efficiently, the same would not be true with respect to funds represented by a check.  Further, even if the delay in receipt of the funds by the customer's bank is short, the receipts would still not be an insured deposit for a period of time during which the customer could reasonably assume the funds were insured.

At the moment customer funds are "deposited" in the customer's bank, as evidenced by the bank's deposit account records,1 federal deposit insurance attaches.  If the customer's bank were to acknowledge the receipt of funds via an [Company] ATM as an immediate deposit by an appropriate entry in its deposit account records, the ATM transaction could truthfully be represented as a deposit2 if the transaction were otherwise authorized under Texas law.  However, even if the program can be restructured in a way that encourages immediate recognition of funds tendered through an ATM as a deposit, a customer's bank that does not have authority to directly accept deposits in Texas may not accept such deposits at an ATM in Texas, whether or not a bank-agent is employed in Texas, as discussed further below.

Although not necessary to resolution of your request, we briefly address the ability of a Texas bank to act as agent for another bank.  Section 18(r) of the Federal Deposit Insurance Act (12 U.S.C. §1828(r)) and Finance Code §59.005 explicitly authorize certain agency activities among affiliated, insured banks.  The federal law is silent regarding the authority of a bank to act as agent for an unaffiliated bank or, as principal, to use an unaffiliated bank as agent, 12 U.S.C. §1828(r)(1).  Further, a bank may not conduct an activity as agent if the bank lacks authority to conduct the same activity as principal under applicable federal or state law, or as principal, have an agent conduct an activity that the bank cannot conduct directly under applicable federal or state law, 12 U.S.C. §1828(r)(3).

A Texas state bank has explicit authority to act as agent for an unaffiliated bank under Finance Code §59.005 including, effective September 1, 2001, an out-of-state bank without a Texas presence.3  As is the case under federal law, a state bank may not conduct an activity as agent if the bank lacks authority to conduct the same activity as principal under applicable federal or state law, or as principal, have an agent conduct an activity that the bank cannot conduct directly under applicable federal or state law, Finance Code §59.005(e).

Neither the federal statute nor the state statute purport to fully occupy the field of the law of agency as applied in banking; the primary purpose of each statute is to create a "safe harbor" by declaring that engaging in explicitly authorized agency activities will not cause the bank-agent to be considered a "branch" of its principal.4  Both the federal and state statutes expressly preserve the law of agency as such might be applied in other circumstances.5  However, the statutory restriction that requires a bank to be adequately empowered to directly perform an action it seeks to perform as agent, or seeks an agent to perform, is at its core a fundamental principle of the law of agency and would continue to apply outside the parameters of these statutes.

Therefore, a customer's bank that does not have authority to directly accept deposits in Texas may not accept deposits through an ATM in Texas, whether or not a bank-agent is employed in Texas.  However, this conclusion does not dilute the force of our primary response to your question.  Regardless of whether a customer's bank has the authority to directly accept deposits in Texas, [Company] is fully authorized as a Texas-licensed money transmitter to accept funds tendered through ATMs in Texas by the bank's customers for transmission to the bank, but must not represent the receipt of funds at the ATMs in such a manner as to imply or allow the inference that the funds have been deposited in the customer's bank prior to the time the bank actually receives the funds.

Opinion No. 01-06

A state bank affiliated insurance agency may pay more that nominal, contingent referral fees to certain bank officers if the officers are appropriately licensed as insurance solicitors under state law.

June 7, 2001

Steve Martin, Assistant General Counsel

By letter dated March 14, 2001, you requested our opinion as to whether a state bank affiliated insurance agency may pay more than nominal referral fees, to be paid if the customer referral results in the sale of an insurance product by the agency, to certain of the bank's officers if the officers are appropriately licensed as solicitors under the Texas Insurance Code.  Without interpreting or addressing the application of Texas insurance laws, we conclude that a state bank affiliated insurance agency may pay such referral fees.

Factual Background

As you explain in your letter, [****] Bank (Bank) has an insurance agency subsidiary, [****] Insurance Agency, Inc. (Agency).  Agency maintains a general lines insurance license under the Texas Insurance Code and is a wholly-owned subsidiary of the Bank.  The Bank and the Agency propose to establish a program whereby the Agency would pay referral fees to certain officers of the Bank when a customer referral from the officer results in the Agency's sale of an insurance product.  The referral fee paid could be more than nominal in amount.  You state that any officers who participate in this compensation program would be required to be licensed by the Texas Insurance Department as solicitors pursuant to Article 21.14 of the Texas Insurance Code.  You also state that the Bank, its officers, and employees, would adhere to the consumer protection rules set forth in 12 C.F.R. Part 343.

Analysis

As a starting point, we note that there is no prohibition under the Texas Finance Code or the regulations promulgated thereunder regarding the payment of referral fees to the Bank's officers as above described.  However, the Texas Department of Banking (the "Department") has issued two opinions that are instructive in considering your question.  In Opinion No. 93-7 (September 30, 1993), the Department advised a Texas state bank that it had no objection to a proposed program whereby certain of the bank's employees would serve as dual employees of an insurance agency.  However, that opinion cautioned the bank concerning possible confusion about the provision of deposit insurance and other consumer-related matters.  In that regard, we note that you intend to comply with the insurance consumer protection rules set forth at 12C.F.R. Part 343.  In Opinion 95-55 (December 6, 1995), the Department advised a state bank that it had no objection to the receipt of a commission by a bank officer who was also a part-time real estate broker.  That opinion observed that the state did not have a law similar to the federal bank bribery law, discussed below.  While approving the proposed activity, Opinion No. 95-55 noted our concern about the possible application of federal laws and potential conflicts of interest.

Your question implicates 12 C.F.R.§343.50(b), a federal regulation that addresses the payment of referral fees to an employee "who accepts deposits from the public in an area where such transactions are routinely conducted in the bank . . ."  The preamble to this regulation indicates that the provision is directed to bank tellers and the regulation has been interpreted accordingly.  Upon review, we do not believe that this regulation applies to your proposal.  Another federal law which must be considered is 18U.S.C. §215, the so-called Bank Bribery Act.  This section prohibits "corruptly" giving anything of value to a bank officer in connection with any business or transaction of the bank.  It further prohibits a bank officer from "corruptly" accepting anything of value from any person intending to be influenced or rewarded in connection with any business or transaction of the bank.  This section appears to target the prohibited activity in the context of the obtaining of loans.  In fact, the section is entitled "Receipt of commissions or gifts for procuring loans."  We have reviewed this section and conclude that it does not apply to the proposal contained in your letter.

In addition to the foregoing, we also base our opinion in this matter on your representations that the bank employees who may refer customers to the Agency, and who may in turn receive referral fees, will be licensed under the Texas Insurance Code as solicitors.  It appears that a solicitor's license must be obtained in order to procure business for any insurance company and to receive valuable consideration for the referral. Texas Insurance Code Article 21.14, §4.  However, we express no opinion on, or interpretation of, the Texas Insurance Code.  We suggest you contact the Texas Department of Insurance for any questions you have regarding the application of the Texas Insurance Code.

Conclusion

Subject to your representations in your letter of March 14, 2001, and our assumptions noted above, we conclude that a state bank affiliated insurance agency may pay more than nominal referral fees, to be paid if the customer referral results in the sale of an insurance product by the agency, to certain of the bank's officers if the officers are appropriately licensed as solicitors under the Texas Insurance Code.  This opinion is limited to the facts and circumstances set forth in your letter of March 14, 2001.  Any change in those facts, circumstances, or the stated assumptions underlying our opinion may result in a different opinion.

Both the bank's documented procedures and actual practice in this matter should assure the board of directors and this office that there is neither an abuse of customers nor any safety and soundness risk to the bank through misplaced or inappropriate incentives.

Opinion No. 01-05

A Texas state-chartered trust company may market its services in states other than Texas, and accept referrals from and pay referral fees to affiliates and non-affiliated third parties relating to potential customers located in states other than Texas, if permitted by the laws of such other states.

May 31, 2001

Shannon Phillips Jr., Assistant General Counsel

This letter is in response to your letter dated May 2, 2001, addressed to Randall S. James, Commissioner of the Texas Department of Banking.  Your letter requests confirmation that a Texas state-chartered trust company under Texas law may, subject to satisfying any legal requirements in the applicable states, (a) market its services in states other than Texas, and/or (b) accept referrals from affiliates and non-affiliated third parties relating to potential customers located in states other than Texas and pay a referral fee for such referrals.

Summary of Opinion

A Texas state-chartered trust company satisfying the requirements of the Act may (a) market its services in states other than Texas, and (b) accept referrals from affiliates and non-affiliated third parties relating to potential customers located in states other than Texas and pay a referral fee for such referrals.

Background

In your letter, you advise the Department that a Texas state-chartered trust company (the "Company") is contemplating generating business from (a) referrals from employees of the company and other affiliates located in Texas and states other than Texas; (b) referrals from independent third parties, e.g., accountants, attorneys, and financial consultants, located in Texas and states other than Texas; and (c) direct marketing in states other than Texas.  The Company's marketing and referrals will relate to activities that the company proposes to accept and perform in Texas using its powers as a Texas state-charted trust company, subject to satisfying any legal requirements in the applicable states.

Analysis

Texas Trust Company Act (the "Act"), Vernon's Texas Civil Statutes, Article 342a-9.003 [now Finance Code §187.003], provides that "subject to the approval of the banking commissioner pursuant to Section 3.203 [now Finance Code §182.203], a state trust company may engage in the trust business in another state or foreign country at a trust office or a trust representative office to the extent permitted by and subject to applicable laws of the state or foreign country."  [Finance Code §182.203] allows a Texas state-chartered trust company to "establish and maintain additional offices by filing a written notice with the banking commissioner setting forth the name of the state trust company, the street address of the proposed additional office, a description of the activities proposed to be conducted at the additional office, and a copy of the resolution adopted by the board authorizing the additional office."

Based on the facts as presented, the methods the Company is contemplating to generate business in states other than Texas do not involve establishing and maintaining additional offices.  It is the opinion of the Department that [Finance Code §187.003] does not require the Company to establish and maintain additional offices in the other states where it anticipates engaging in the activities contemplated.

This opinion is based strictly on Texas law and makes no conclusions as to any other state's licensing, registration or other requirements necessary to undertake the proposed activity in that other state.  Further, this opinion is limited to the facts and circumstances set forth in your letters referenced above, and any change in those facts or circumstances may result in a different opinion.

Opinion No. 01-04

Sarah Shirley, Assistant General Counsel

May 30, 2001

An out-of-state, federal savings bank with trust powers may engage in fiduciary activities in this state with respect to perpetual care cemetery trusts and prepaid funeral benefit trusts created under Texas law if the bank establishes a physical Texas presence through a branch or representative trust office.

By letter dated January 5, 2001, you ask the Department of Banking ( the "Department") to grant [****] Bank (the "Bank") a "variance" from Health & Safety Code §712.021(a) and Finance Code §154.253, which require the trustee of a perpetual care cemetery trust to be located in Texas and a trustee of a prepaid funeral benefit trust to have its main office or a branch in Texas, respectively.

Summary of Opinion

An out-of-state, federal savings bank with trust powers may engage in fiduciary activities in this state with respect to perpetual care cemetery trusts and prepaid funeral benefit trusts created under Texas law if the bank establishes a physical Texas presence through a branch or representative trust office.

Background

In your letter, you advise the Department that a Texas perpetual care cemetery corporation has approached you "to see if the Bank could assist his company in setting up a perpetual care trust."  Apparently, the corporation wishes to transfer its perpetual care cemetery trust funds from the current trustee to the Bank.  You have provided additional details about the proposed trust activities during our several telephone conversations.  Although your letter mentions only activities as trustee of a perpetual care cemetery trust, you advise that the Bank also wishes to serve as the trustee of prepaid funeral benefit trusts.  You also advise that the Bank has its principal office in [City], [State], and does not currently have an office in Texas.

Analysis

In our opinion, an out-of-state, federal savings bank with trust powers may engage in fiduciary activities in this state without qualification in all but a few circumstances.  With respect to acting as a fiduciary for prepaid funeral benefits and perpetual care trust funds under Texas law, fiduciary relationships that would not exist but for Texas law, an out-of-state federal savings bank may only do so if it establishes a physical Texas presence through a branch or representative trust office.1

Health & Safety Code §712.021(a), pertaining to perpetual care trust funds, requires a corporation that operates a perpetual care cemetery in Texas to have a trust fund established with a trust company or bank with trust powers that is located in this state.  Health & Safety Code §712.028 requires that the cemetery corporation "deposit" specific amounts collected from the sale of perpetual care property into the trust fund, and §712.029 establishes requirements pertaining to the timing of and accounting for "deposits."

Finance Code §154.253 requires that money paid or collected on prepaid funeral benefits contracts be "deposited" into either an insured, interest bearing account with a financial institution that has its main office or a branch in Texas, or in trust with a financial institution that has its main office or a branch located in this state and is authorized to act as a fiduciary in Texas.

Health & Safety Code §712.021(a) and Finance Code §154.253 are not banking statutes.  In the context of these statutes, the word "deposit" is not used in the same manner as in banking statutes because the term includes a contribution to a trust, which is not a "deposit" transaction.  Finance Code §154.253 permits either a deposit account or a trust account, and refers to both forms of account as "deposits."  Similarly, we believe the terms "located," "main office," and "branch" are not used in the same manner as in banking statutes when referring to trust accounts, but simply require that the funds be received by the fiduciary institution in Texas subject to Texas law.  A physical Texas location, such as a branch or representative trust office, will therefore satisfy the requirements of Health & Safety Code §§712.021, 712.028, and 712.029, and Finance Code §154.253.  We believe this interpretation accomplishes the purposes for which the office location requirements were enacted - to ensure that Texas-based perpetual care trust funds and prepaid funeral benefit trust funds are received and receipted for in Texas and are subject to and dealt with in accordance with Texas law.

Accordingly, the Bank may act as trustee of perpetual care cemetery trust funds or prepaid funeral benefit trust funds in Texas if it establishes a branch or representative office in this state to engage in prepaid funeral benefits and perpetual care cemetery-related fiduciary activities, and complies with applicable provisions of Texas law and the Department's rules.  Certain Texas laws impose minimal requirements.  Specifically, the Bank must register with the Texas Secretary of State, pursuant to Finance Code §201.102, and, if establishing a representative trust office, must comply with the requirements of [Finance Code §187.202].

Once the required registrations have been completed with the Secretary of State and the Savings and Loan Commissioner, any Texas perpetual care cemetery corporation or prepaid funeral benefits contract seller that desires to use the Bank as trustee should contact Ms. Sheila Armstrong of the Department's Special Audits Division for specific instructions regarding how to proceed with the deposit or transfer of trust funds, inasmuch as the requirements vary somewhat depending upon whether the funds in question are prepaid funeral benefits funds or perpetual care funds.  In either event, the Department will require that the Bank, prior to receiving any of these trust funds, execute and return to the Department an acknowledgment affirming its agreement to, among other things, receive and provide a receipt for trust funds at its Texas branch or representative trust office, and comply with and be bound in all respects by the requirements of Health & Safety Code Chapter 712 and Finance Code Chapter 154 applicable to fiduciaries, specifically including those pertaining to the protection of perpetual care cemetery funds and prepaid funeral benefits funds.

Opinion No. 01-03

A nationally chartered bank and its agents may engage in the currency transmission business and are exempt from state licensing requirements. However, general state corporate law applies regarding qualification to do business in Texas.

May 1, 2001

Steve Martin, Assistant General Counsel

By letter dated December 27, 2000, you notified the Texas Department of Banking of the intention of [*****] Bank to establish remittance banking operations in the State of Texas involving the receipt of money for the purposes of transmission to foreign countries. Your notification raises the question as to whether a nationally-chartered bank may conduct currency transmission activities through an agent located in Texas without a currency exchange license. As discussed below, [*****] Bank and its agents would be exempt from required licensure under Chapter 153 of the Finance Code, for the conduct of currency transmission business. However, other state law applies.

Factual Background

You explain that the proposed operations will be conducted under the name "[ABC]," and will be accomplished through a network of remittance agents trained and approved by the [*****] Bank after thorough background investigations. The approved agents will accept funds for transfer and the associated fee at locations in Texas. Upon receipt of the funds from the customers,[*****] Bank will initiate an internal payment order to a correspondent bank in a foreign country, such as Mexico. The payment order will contain the amount being remitted as well as information for both remitter and beneficiary. The correspondent bank will then issue a payment order to a local branch office that is located in close proximity to the beneficiary.

Analysis

A person may not engage in a "currency transmission business" in Texas unless the person holds a currency transmission license. Finance Code §153.101. "Currency transmission business" is defined as a business that engages in "currency transmission" as a service or for profit. Finance Code §153.001(5). "Currency transmission" is in turn defined as the receipt of "currency" (or an instrument payable in currency) for the purpose of transmitting the currency or its equivalent by wire, computer modem, facsimile, or other electronic means through the use of a financial institution, financial intermediary, a federal reserve system, or other funds transfer network. Finance Code §153.001(6). Finally, "currency" is a medium of exchange authorized or adopted by a domestic or foreign government. Finance Code §153.001(3).

While [*****] Bank and its agents would be engaged in currency transmission, an exemption from licensing under Finance Code, Chapter 153 is provided by §153.117(a)(1) for a federally insured financial institution organized under the laws of this state, another state, or the United States. As a nationally-chartered bank,[*****] Bank would be exempt.

An additional issue is raised, however, by Finance Code §153.105, which provides that a "license holder" may conduct currency transmission business at multiple locations in this state if each location, whether the location is owned and operated directly by the license holder or by a principle appointed by the license holder, is separately licensed pursuant to an application submitted in accordance with Chapter 153. We must decide whether, even though [*****] Bank is itself exempt from the licensure requirement, [*****] Bank´s agents must be licensed under §153.105. [*****] Bank represents that its agents will be carefully screened, selected, and trained, and we understand that [*****] Bank will direct and exercise control over its agents. Moreover, we note that under the law of agency, a principal is responsible and liable for the acts of its agent. Additionally, as we have noted in prior opinions, one of the primary purposes of Chapter 153 is to enhance federal efforts to prevent money laundering. [*****] Bank, and its agents, will be subject to federal record keeping requirements found in 31 C.F.R. §103. Further, there is nothing in Chapter 153 that specifically requires the agents of exempt entities to be licensed. Based on the foregoing, we are of the opinion that the remittance agents of [*****] Bank would not be required to be licensed under §153.105.

Other Applicable Law

While a currency exchange license is not required, there are other state laws that [*****] Bank should observe. An out-of-state bank, including a nationally-chartered bank, must file an application for registration with the Secretary of State prior to operating a branch office or other office in this state and must comply with the laws of this state relating to foreign corporations doing business in this state. Finance Code §201.102. a foreign corporation is required to obtain a certificate of authority from the Secretary of State prior to transacting business in this state. Business Corporation Act Article 8.01(a).

A foreign corporation must also maintain a registered office and registered agent in this state. Business Corporation Act Article 8.08. Additionally, a corporation which regularly conducts business in this state and operates under an assumed name must file an assumed name certificate pursuant to Business & Commerce Code §36.11. The certificate must be filed with the Secretary of State and with the county clerk in the county of residence of the registered agent. Although not directly relevant, the Interagency Statement on Branch Names published as OCC Bulletin 98-22 (May 12, 1998) may be helpful in understanding the potential confusion that can result from the use of assumed names and the need to comply with state law in that regard. It may be helpful to obtain local counsel for the above, and to assist you in researching any other applicable law.

Conclusion

Subject to your representations and our assumptions noted herein, we conclude that [*****] Bank and its agents may engage in the currency transmission business without being licensed under Chapter 153 of the Finance Code. However, other state law applies.

This opinion is limited to the facts and circumstances set forth in your letter of December 27, 2000. Any change in those facts, circumstances, or the stated assumptions underlying our opinion may result in a different opinion.

Opinion No. 01-01

Whether a state bank's loans to two companies must be aggregated for legal lending purposes, if the 50% owner of one company guarantees a loan to the other company and pledges collateral to support the guaranty, is a question of fact that must be resolved with regard for specific circumstances.

February 1, 2001

Steve Martin, Assistant General Counsel

By letter dated November 6, 2000, to Everette Jobe, General Counsel, Department of Banking, you ask whether a state bank's loans to two companies must be aggregated if the 50% owner of one company guarantees a loan to the other company, and pledges collateral to support the guaranty.  We conclude that such loans need not be aggregated.

Factual Background

[***] Bank (Bank) has a lending relationship with two companies, [Company A] and [Company B].  You state that while there is common ownership between the two companies, they operate independently of one another.  Company A is a vending service and Company B is a business management and consultant company.  You additionally state that the proceeds of the loans to one company do not benefit the other and that the sources of repayment are not the same.  However, one of the guarantors has pledged personal assets, shares listed on the New York Stock Exchange, as collateral to partially secure a letter of credit for which Company A, Inc. is the beneficiary.  Further, this guarantor owns 50% of Company B and 12.5% of Company A.

Analysis

Pursuant to §34.201(a) of the Texas Finance Code, the total loans and extensions of credit outstanding at any time by a state bank to one borrower may not exceed 25% of the bank's capital and certified surplus.1 Generally, for the purposes of computing the legal lending limit, a loan or extension of credit to one borrower is attributed to another person and each person will be considered a borrower if (1) proceeds of the loan or extension of credit are to be used for the direct benefit of the other person, (2) a common enterprise is deemed to exist between the two persons, or (3) the expected source of repayment for each loan or extension of credit is the same for each person. 7 TAC §12.9(a).

You represent that the proceeds of the loans to each of the companies do not benefit the other company and, further, that the sources of repayment for the loans are not the same.  That leaves the question as to whether under the facts a common enterprise exists.  A common enterprise exists if loans are made to affiliated borrowers, and the borrowers are financially interdependent. 7 TAC §12.9(c).  Borrowers are affiliated if "one borrower directly or indirectly controls, is controlled by, or is under common control with another borrower." 7 TAC §12.9(c)(2).  Based on your representations, there is no common control among the borrowers, therefore they are not "affiliated," and a common enterprise does not exist.

The pledge of collateral by the guarantor as described above may often indicate that the bank is relying primarily on the guarantor for repayment of the loan.  Under 7 TAC §12.9(g), the derivative obligation of a guarantor is not required to be aggregated with direct loans or extensions of credit to the guarantor only if the lending bank is relying primarily on the creditworthiness of the primary obligor.  You have represented that the bank is relying primarily on Company A and Company B, respectively, for repayment and not the personal guarantee of the guarantor.  Consequently, the indebtedness of the two companies need not be aggregated with each other on that basis.  The reliance of the lending bank on the primary obligor must be evidenced by the certification of an officer of the bank that the bank is, on stated facts, relying primarily on the responsibility and financial condition of the primary obligor for payment of the loan or extension of credit and not on the guarantee of the guarantor.  Assuming evidence exists in the Bank's files to reasonably support its determination that Company A and Company B each have the ability and capacity to repay their respective loans and that the decision to fund each loan was based upon such determination, and assuming each loan file contains the requisite Bank officer certification, the requirements of 7 TAC §12.9(g) are satisfied.

While is it not necessary for resolution of this matter to consider the guarantor's pledge of readily marketable collateral pursuant to 7 TAC §12.5(d), loans or extensions of credit to one borrower may exceed the bank's lending limit by an additional 15% to the extent that the amount that exceeds the bank's lending limit is fully secured by readily marketable collateral.  The bank is required to properly perfect its security interest in the collateral and the collateral at all times must have a market value of at least 100% of the amount of the loan or extension of credit that exceeds the bank's lending limit. 7 TAC §12.5(d).

Conclusion

Subject to your representations and our assumptions, we conclude that a state bank's loans to two companies are not required to be aggregated where the 50% owner of one company guarantees a loan to the other company, and pledges collateral to support the guaranty, as long as the lending bank is relying primarily on the creditworthiness of the primary obligor.

Our conclusion should not be construed as an endorsement of the proposed loan.  A bank must heed the underlying purpose of the legal lending limit, reduction of risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of the state bank's funds.  Further, while a bank is clearly empowered to make loans as described in this opinion, the bank in question must have the ability, capacity, and commitment to appropriately evaluate and manage the risks inherent in such lending activities.

Finally, this opinion is limited to the facts and circumstances set forth in your letter of November 6, 2000, the accompanying information, and our telephone conversations.  Any change in those facts, circumstances, or the stated assumptions underlying our opinion may result in a different opinion.

Opinion No. 00-13

A vendor conducting ATM site safety evaluations may be required to register as a private security consultant with the Texas Commission on Private Security.

September 15, 2000

Steve Martin, Assistant General Counsel

I am responding to your letter of August 11, 2000, to Everette D. Jobe, General Counsel of the Texas Department of Banking.  As I explained in our conversation of today, there are no licensure requirements of the Texas Department of Banking or Texas Finance Commission for performing ATM site safety evaluations to assist state banks in determining their level of compliance with Sections 59.301-59.310 of the Texas Finance Code.  The conduct of your business as described in your letter does not implicate any licensing requirements of the Department or Commission.

As I also mentioned in our telephone conversation, it is possible that you may be required to register as a private security consultant with the Texas Commission on Private Security.  An individual acts as a private security consultant if the person offers advice or services in the field of private security.  Texas Occupations Code, Section 1702.226.  "Private security consultant" is defined to mean a person who "consults, advises, trains, or specifies or recommends products, services, methods, or procedures in the security loss prevention industry."  Texas Occupations Code, Section 1702.002(28).  I have enclosed pertinent portions of the law relating to private security consultants. I suggest you contact the Commission on Private Security to ascertain if any licensing or registration requirements exist for the conduct of your business.

Opinion No. 00-12

Permanent residential mortgage loans originated and underwritten by a state bank, acting as a direct endorsement lender for FHA and VA, are not exempt from the legal lending limit because the take-out commitment extends to the home buyer and not the home builder and key protections afforded the bank by the commitments are not unconditional.

November 16, 2000

Steve Martin, Assistant General Counsel

By letter dated March 6, 2000, you ask whether an interim construction contract house loan guaranteed by FannieMae (FNMA), Federal Housing Administration (FHA), or Department of Veteran Affairs (VA) is counted toward a bank's legal lending limit.  You additionally seek clarification of Opinion No. 91-2 (April 19, 1991).  As discussed more fully below, we conclude that such a loan is subject to the legal lending limit established in Texas Finance Code Section 34.201(a) because the take-out commitment extends to the home buyer and not the home builder, and key protections afforded the bank by the commitments are not unconditional.

Background

[****] Bank (the "Bank"), through its subsidiary [****] Mortgage [Company], is a direct endorsement lender for FHA and VA and a designated underwriter for FNMA and is thus qualified to originate and underwrite permanent residential mortgage loans.  You represent that a part of the Bank's lending activity includes interim construction financing.  You state that in reliance on Opinion No. 91-2, the Bank has been operating under the premise that interim construction loans to a home builder supported by a permanent funding takeout commitment from an approved FNMA, FHA, or VA direct endorsement lender are not subject to bank lending limits.  Opinion No. 91-2 determined that certain interim construction loans subject to the purchase obligation of Farmers Home Administration (FmHA) were excluded from legal lending limit requirements.

Analysis

Pursuant to §34.201(a) of the Texas Finance Code, the total loans and extensions of credit outstanding at any time by a state bank to one borrower may not exceed 25% of the bank's capital and certified surplus.1 The underlying purposes of this limitation are to protect the safety and soundness of state-chartered banks by preventing excessive loans to one person, and to promote diversification of loans to reduce portfolio and credit risk. See 7 TAC §12.1(a).  This limitation does not apply, however, to "the portion of an indebtedness that this state, an agency or political subdivision of this state, the United States, or an instrumentality of the United States has unconditionally agreed to purchase, insure, or guarantee." Tex. Fin. Code §34.201(a)(8).2

To determine if the exemption created by §34.201(a)(8) applies, we normally look, first, to discern whether the loan is guaranteed by one of the described governmental entities and, second, whether such guarantee is unconditional.  In this case, however, because of the underlying purposes of the statutory lending limit, we must additionally consider on whose behalf the guarantee is extended.

Whether the Loan Is Guaranteed by One of the Described Governmental Entities

FNMA is a private, shareholder-owned company and receives no government funding. See 12 U.S.C. §§1716 et seq.  As such, FNMA is not an agency or instrumentality of the federal government and, consequently, does not come within the exception of §34.201(a)(8).  The Federal Housing Administration is a department within the Department of Housing and Urban Development. 42 U.S.C. §3533(b).  Both the Department of Housing and Urban Development and the Department of Veterans Affairs are departments within the Executive Branch of the United States Government. 5 U.S.C. §101.  Both Departments are funded by the general appropriations of the United States Government.  All indications point to the FHA and VA loan guarantee programs being guaranteed by agencies of the United States as contemplated by §34.201(a)(8).

On Whose Behalf the Guarantee Is Extended

The facts of the instant case are distinguishable from the facts and holding of Opinion No. 91-2 concerning on whose behalf the guarantee is issued.  In that opinion, a general partnership secured interim financing to construct rental property.  The underlying facts of that opinion involved a take-out commitment to one particular builder for a particular project.  FmHA had specifically approved the project involving a commercial building and issued its guarantee.  In the instant case, no commitment or guarantee extends from the federal agencies to the Bank for the interim construction loan made to the builder.  The take-out commitment as evidenced by the documentation you submitted is issued to the buyer and not to the builder.  Consequently, no protection is afforded to the Bank if the builder defaults and the safety and soundness of the bank are at risk.

Whether the Guarantee is "Unconditional"

The facts of the present case are also distinguishable from Opinion No. 91-2 in regard to the requirement that the guarantee be unconditional.  In the circumstances involved in Opinion No. 91-2, final drawings, specifications, and all other contract documents had been approved by FmHA.  FmHA had determined that the conditions of loan closing could be met.  FmHA further indicated that the funds had been obligated to purchase from the bank and provide permanent financing for the approved loans.  Based on these facts, the Department of Banking determined the underlying interim loan could be excluded from the legal lending limit requirement.  We noted in Opinion No. 91-2 that since the FmHA is obligated to purchase from the bank and provide permanent financing for approved loans subject to certain conditions, these interim construction loans may be excluded from the limitations of Texas Finance Code 34.201(a)(8).

It is apparent from a review of the facts in the present case that the loan guarantees are conditional in nature under the terms of Section 34.201(a).  The Department of Banking addresses this requirement of the guarantee being unconditional in 7 TAC §12.6(f) which provides, in pertinent part:

A takeout commitment, insurance, or guarantee is considered unconditional if the protection afforded the bank is not substantially diminished or impaired if the loss should result from factors beyond the bank's control.  Protection against loss is not materially diminished or impaired by procedural requirements such as an agreement to take over only in the event of default, including default over a specific period of time, a requirement that notification of default be given within a specific period of time, a requirement that notification of default be given within a specific period after its occurrence, or a requirement of good faith on the part of the bank.

In the present case, numerous substantive conditions must be met prior to the time that the guarantee becomes effective.  These include, but are not limited to, final inspection, acceptable appraisal, approved sewer and water systems, title insurance policy, hazard insurance policy, and continuation of all conditions set forth in the application and supporting papers.  The protection the guarantee affords the bank may be substantially diminished or impaired if a loss should result from factors beyond the bank's control.  Consequently, the guarantee is not "unconditional" as that term has been explained in 7 TAC §12.6(f)).

Conclusion

Subject to our assumptions and for the reasons stated above, we conclude that the interim construction contract house loans guaranteed by FannieMae, Federal Housing Administration, and the Department of Veteran Affairs do not qualify for the exception of §34.201(a)(8) of the Finance Code.  Consequently, the legal lending limit established by §34.201(a) of the Texas Finance Code does apply to these loans.

This opinion is limited to the facts and circumstances set forth in your letter of March 6, 2000.  Any change in those facts, circumstances, or the stated assumptions underlying our opinion may result in a different opinion.

Opinion No. 00-10

The portion of a loan that is guaranteed by the United States Agency for International Development is exempt from the legal lending limit.

November 1, 2000

Steve Martin, Assistant General Counsel

By letter dated October 6, 2000, to J.W. Holt, Regional Director of the Department of Banking, you ask whether the portion of a loan guaranteed by the United States Agency for International Development (USAID) is counted toward a bank's legal lending limit.  We conclude that such loans are exempt from the legal lending limit established in Texas Finance Code Section 34.201(a).

Analysis

Pursuant to §34.201(a) of the Texas Finance Code, the total loans and extensions of credit outstanding at any time by a state bank to one borrower may not exceed 25% of the bank's capital and certified surplus.1  This limitation does not apply, however, to "the portion of an indebtedness that this state, an agency or political subdivision of this state, the United States, or an instrumentality of the United States has unconditionally agreed to purchase, insure, or guarantee." Tex Fin. Code §34.201(a)(8).2

To determine if the exemption created by §34.201(a)(8) applies, we look, first, to discern whether the loan is guaranteed by one of the described governmental entities and, second, whether such guarantee is unconditional.  USAID is an independent federal government agency established in the Executive Branch of the United States Government. 22 U.S.C. §6563; see also 5 U.S.C. §104.  USAID is responsible for administering international development and foreign policy goals of the federal government.  The agency is funded by the federal government through the general appropriations process.  The Loan Agreement describes the loan guarantee as a USAID-issued guarantee backed by the "full faith and credit of the U.S. Government."  All indications point to the USAID loan guarantee program being guaranteed by the United States.

The Department of Banking addresses the requirement of the guarantee being unconditional in 7TAC §12.6(f) which provides, in pertinent part:

A takeout commitment, insurance, or guarantee is considered unconditional if the protection afforded the bank is not substantially diminished or impaired if the loss should result from factors beyond the bank's control.  Protection against loss is not materially diminished or impaired by procedural requirements such as an agreement to take over only in the event of default, including default over a specific period of time, a requirement that notification of default be given within a specific period of time, a requirement that notification of default be given within a specific period after its occurrence, or a requirement of good faith on the part of the bank.

We have reviewed the materials you provided, as well as the proposed Loan Guarantee Agreement, and communicated with USAID staff.  The terms and conditions of the Loan Guarantee Agreement are consistent with the requirements of 7 TAC §12.6(f).  USAID agrees to pay the Bank an amount equal to fifty per cent (50%) of its net loss of principal arising from default or other non-performance.  The requirements for submitting, and receiving payment on, a claim are also consistent with 7 TAC §12.6(f).  Based on our review, we have found no reason to believe that a loan made pursuant to USAID's authority would be anything other than "unconditional" as above defined.

The rule also provides that a guarantee is not considered unconditional unless the commitment or guarantee is payable only in cash or its equivalent within 60 days after demand for payment is made.  The Loan Guarantee Agreement provides that upon approval of a claim, USAID will "promptly" pay the Bank.  USAID has represented that it may be possible to provide for a 60-day payment period in the loan guarantee between USAID and the Bank.  We assume for the purposes of this opinion that such requirement would be included.

Conclusion

Subject to our assumptions, we conclude that the legal lending limit of §34.201(a) of the Texas Finance Code would not apply to that portion of a properly made and documented loan that is guaranteed by the United States Agency for International Development.

Our conclusion should not be construed as an endorsement of the proposed loan.  A bank must heed the underlying purpose of the legal lending limit, reduction of risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of the state bank's funds.  Further, while a bank is clearly empowered to make loans as described in this opinion in an amount well in excess of the bank's legal lending limit, the bank in question must have the ability, capacity, and commitment to appropriately evaluate and manage the risks inherent in such lending activities.  Thus, these types of loans will be closely scrutinized by an examiner to monitor the bank's adherence to its policies and procedures and to ensure that the bank is administering such loans in a manner that is consistent with safe and sound banking practices.

Finally, this opinion is limited to the facts and circumstances set forth in your letter of October 6, 2000, the accompanying materials, and the representations of USAID.  Any change in those facts, circumstances, or the stated assumptions underlying our opinion may result in a different opinion.

Opinion No. 00-07

A state bank investment in FNMA adjustable rate preferred stock is not limited by statute, but the investment amount must be consistent with the financial capacity of the bank to safely bear the risks associated with the investment.

May 16, 2000

Loren E. Svor, Assistant General Counsel

By letters dated March 14 and 15, 2000, you have asked whether floating rate preferred stock issued by the Federal National Mortgage Association ("FNMA") is a permissible investment for Texas state banks, and if so, whether it is subject to a limitation with respect to the amount in which a state bank may invest.  As discussed in detail below, in our opinion, a state bank investment in FNMA adjustable rate preferred stock is not limited by statute, but the investment amount must be consistent with the financial capacity of the bank to safely bear the risks associated with the investment.

Facts

The subject of your inquiry is FNMA perpetual preferred stock with a dividend rate that adjusts every two years to an (expected) 10-15 basis points below the two year treasury bill rate (the "Securities").  The Securities carry no voting rights and are callable on each adjustment date.  The dividend is non-cumulative but must be paid before a common stock dividend may be paid.  The Securities will be rated investment-grade, and will be traded on the New York Stock Exchange.  Income from the Securities will be treated as dividends for federal tax purposes, and will be eligible for the 70% exemption allowed for dividends under the tax code.

Discussion

A state bank may invest without limitation in "investment securities issued or guaranteed by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Agricultural Mortgage Company, or the Federal Farm Credit Banks Funding Corporation . . . ." Finance Code §34.101(e)(5) [now §34.101(d)(5)-(7)].  FNMA is authorized by its enabling legislation to issue preferred stock. See 12 U.S.C. §1718(a).  The Securities are one such issue, and if they are "investment securities," are exempt from the investment limitations of the Finance Code.

Preferred stock has traditionally been considered an equity issue and as such would not be a permissible investment for a state bank. See Finance Code §34.101(c) [now §34.101(b)(2)].  However, in recent years entities seeking to minimize their financing costs have issued various securities that, while denominated as preferred stock, are intended to attract investors that otherwise would purchase traditional debt securities (such as, e.g., bonds).  These "debt-like" issues reduce the issuer's financing costs because 70 percent of the "dividends" paid, unlike interest, are not taxed for a corporate investor.  The issuer can therefore offer a lower rate than for a pure debt issue (given equal credit risk factors) because the dividend exclusion results in a higher effective rate to the corporate purchaser.

For regulatory purposes, the existence of these "hybrid" securities mandates a functional analysis rather than a strict reliance on denomination to determine whether they are "debt" or "equity." The Securities have many of the characteristics of debt.  In particular, they convey no voting rights, do not share in the profits of the issuer, and do not change in value in relation to changes in the valuation of the issuer (although, like debt, their value can diminish if a decline in the credit-worthiness of the issuer raises doubts that the dividend can be paid).  The Securities are rated investment grade, unlike equity securities which typically are not rated, and trade on a national exchange, which assures liquidity.  We are of the opinion that the Securities are investment securities issued by the Federal National Mortgage Association ("FNMA").  Consequently they are subject to the exemption from normal investment limits pursuant to Finance Code [§34.101(d)(5)].

We are also of the opinion that Finance Code §34.101(h) [now §34.101(f)], which imposes a separate limit on an investment in adjustable rate preferred stock, does not apply to the Securities.  This limitation directly conflicts with Finance Code [§34.101(d)(5)], which provides that investment security issues of FNMA are not subject to an investment limit.  As matter of statutory interpretation, we are required to interpret the conflicting provisions such that both are given effect, if possible. Government Code §311.026(a).  When that cannot be done, as it cannot here, a special provision is to be treated as an exception to a general provision. Government Code §311.026(b).  Finance Code [§34.101(f)] is a provision which deals generally with adjustable rate preferred stock, which is issued by general business corporations as well as quasi-governmental entities like FNMA.  Finance Code [§34.101(d)(5)], on the other hand, is concerned specifically with issues of quasi-governmental corporations such as FNMA.  Section [34.101(d)(5)], providing for no investment limitation on such issues, therefore controls over the general limitation of [§34.101(f)].  The Securities may purchased by a state bank without statutory limitation.1

While a state bank may legally invest in the Securities without limit, a bank must recognize that, as with any traded security, there are market risks associated with an investment in the Securities.  Share prices may decline due to changes in interest rates, the issuer's financial condition, or government tax policies.  Therefore, the Department of Banking will expect that a state bank limit its investment in the Securities to an amount that reasonably relates to the amount of earnings and capital that it is prudent to place at risk.

Finally, while we conclude that a state bank may invest in the Securities subject to the considerations discussed above, this opinion is not an endorsement of a state bank investment in the Securities.

Opinion No. 00-06

An out-of-state bank with lawfully operating Texas branches may establish additional branches on the same basis as if it were a Texas state-chartered bank, including de novo, through purchase of a branch of another bank, or through the acquisition of an existing bank, regardless of age.

February 7, 2000

Loren E. Svor, Assistant General Counsel

I have been asked to respond to your request for an opinion on the above referenced issue.  In your original letter of December 23, 1999, you indicated that you represent [***] Bank ("[***]" or the "Bank") an Alabama state-chartered bank which is a wholly-owned subsidiary of [***], Inc., a registered bank holding company (the "holding company") headquartered in [City], Alabama.  The Bank currently operates three branches in Texas, resulting from two 1998 mergers with Texas banks pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act (12 U.S.C. §1831u) ("Riegle-Neal").  Your specific question is whether the normal requirement that a bank which is acquired by an out-of-state bank have been in continuous existence for at least five years applies to an acquiring bank, such as [***], that already has operating Texas branches.  It is our opinion that an out-of-state bank with lawfully operating Texas branches may establish additional branches on the same basis as if it were a Texas state-chartered bank, including de novo, through purchase of a branch of another bank, or through the acquisition of an existing bank, regardless of age.

Riegle-Neal provided a framework for interstate branching of state and national banks.  In general, Riegle-Neal provided that after June 1, 1997, the responsible federal regulator could approve a merger transaction between insured banks with different home states pursuant to 12 U.S.C. §1828(c), notwithstanding a statute of a home state prohibiting such a transaction. 12 U.S.C. §1831u(a)(1).  This authority was subject to two limitations: (1) a state could "opt out" of interstate branching by enacting a law after September 29, 1994, and before June 1, 1997, prohibiting merger transactions involving all out-of-state banks; and (2) the merger is subject to meeting any state age requirements for the entity being acquired, up to a maximum of five years. 12 U.S.C. §§1831u(a)(2)(A) and (a)(5)(A).  Texas attempted to opt out, but the statutory language failed to meet the requirements of Riegle-Neal in that the prohibition did not apply to out-of-state state savings banks, and consequently did not apply to all banks. See Opinion No. 98-27 (July 30, 1998).  With it no longer possible to enact an "opt out" statute, Texas enacted, effective September 1, 1999, a comprehensive interstate branching framework as Chapters 201-204, Finance Code.

Finance Code, §203.005(a) provides that:

An out-of-state bank may not acquire a Texas bank in an interstate merger transaction if the Texas bank has not been in existence and in continuous operation for at least five years as of the effective date of the interstate merger transaction.  However, this section does not apply if the acquiring out-of-state bank could establish a de novo branch in this state pursuant to Section 203.002.1

Although there is nothing in the wording of §203.005 to so indicate, Finance Code §203.006 makes clear that §203.005 applies only to the initial acquisition of a Texas bank by providing that:

An out-of-state bank that has established or acquired a branch in this state under this chapter may establish or acquire additional branches in this state to the same extent that a Texas state bank may establish or acquire a branch in this state under applicable state and federal law.

See also 12 U.S.C. 1831u(d)(2) (following the consummation of an interstate merger transaction, the resulting bank may establish or acquire a branch anywhere any of the banks involved in the transaction could have done so if they had not merged).  Because a Texas state bank can acquire an existing bank through merger or purchase of all or substantially all of the existing bank's assets, without regard for the age of the bank being acquired, an out-of-state bank with a lawfully operating branch in Texas would be accorded the same privilege. See Tex. Fin. Code §§32.203, 32.301, & 32.401.2

In summary, the requirement of Finance Code, §203.005, that an out-of-state bank may acquire by merger or purchase a Texas bank only if the Texas bank has been in existence and continuous operation for five years or more applies only to the first of such acquisitions; an out-of-state bank with a branch in Texas may branch under the same terms and limitations which apply to a Texas state bank.

Opinion No. 00-03

A state bank may sell title insurance directly or through an operating subsidiary if the selling entity is appropriately licensed as a title insurance agent under state law.

Originally issued March 6, 2000; revised August 22, 2000

Loren E. Svor, Assistant General Counsel

By letter dated November 19, 1999, you asked whether a Texas state-chartered bank (a "state bank") may sell title insurance as an agent, either directly or through a subsidiary.  As you point out, the answer to this question is important for nationally-chartered banks, as well as state-chartered banks, as a result of the passage of the Gramm-Leach-Bliley Act ("GLBA"), effective November 12, 1999, which reversed the long-standing position of the Office of the Comptroller of the Currency ("OCC") permitting such activity.  GLBA prohibits this activity for a national bank, or national bank subsidiary, unless it was engaged in the activity prior to the enactment of GLBA, or unless, and only to the extent that, a state bank could engage in the activity.  In our opinion, pursuant to Texas banking law governing the powers and permissible activities of a state bank or operating subsidiary, Finance Code §§32.001 and 34.103, a state bank may sell title insurance directly, or through an operating subsidiary, if either is appropriately licensed by the Texas Department of Insurance.

Background

GLBA established a federally-mandated framework that both allows and encourages the convergence of the banking, insurance and securities industries.  Legal barriers that have separated the industries (securities from banking since the Depression, and insurance from banking since bank holding company regulation began in the 1950s) are dissolved or significantly modified at the national level, and most contrary provisions at the state level are preempted.  As a result, even though banks have for some time engaged in securities activities to a limited extent, they now may do so through a financial holding company relatively free from limitations on the scope of those activities. See GLBA, §103 (adding subsection (k) to 12 U.S.C. §1843).  Further, most state insurance laws, rules, or interpretations that limit a bank's ability to sell, solicit, or cross-market insurance products are rendered ineffective, subject to specifically delineated and nondiscriminatory consumer protection measures which are statutorily protected from preemption. See GLBA §104 (c) and (d) [15 U.S.C. §6701(c) and (d)].

GLBA makes clear that the responsibility for functional regulation of securities and insurance activities will remain with the authority that has traditionally regulated the activity.  Thus, insurance activities conducted by banks are subject to state insurance licensing requirements, provided that these requirements do not prevent or significantly interfere with the ability of an insured depository institution to engage in such activities or acquire functionally-regulated affiliates, as permitted by GLBA. See GLBA, §104(b) [15 U.S.C. §6701(b)].  For the most part, regulation of the functional aspects of the insurance business entails only minor rearrangement of traditional lines of regulatory responsibility, although it will be necessary for bank regulators to be aware of the impact of such regulation on the safety and soundness of their regulated entities.  However, it is likely that clearly delineated areas of responsibility will not always pertain.  For example, if an insurance law or regulation applicable to an insured depository institution is potentially subject to preemption under GLBA, the Department of Insurance will bear primary responsibility for the analysis, but the Department of Banking will also have a responsibility to address the issue to ensure non-discriminatory treatment of state banks and their affiliates.

This opinion addresses your question on insurance activities from the banking perspective, including our opinion on the applicability of related aspects of GLBA.

Analysis

A corporation may plainly be licensed as a title insurance agent.  Title insurance is governed by the Texas Title Insurance Act (Chapter 9 of the Insurance Code), which specifies, at Article 9.36-1(a), that a "person, firm, association, or corporation" may be licensed as a title insurance agent.  As a corporation authorized to transact business in Texas, a bank's operating subsidiary would therefore clearly be eligible for a license, provided other applicable regulatory requirements are satisfied.1  However, at this point direct agent licensing of a bank may present novel and complex questions that the Texas Department of Insurance must first address before we can conclusively state that a state bank may directly act as a title insurance agent.

Assuming the Insurance Code would permit a state bank to be licensed as a title insurance agent, an issue that must first be resolved by the Texas Department of Insurance,2 in our opinion no impediment exists in Texas banking law to a state bank directly selling title insurance as agent.  A state bank is expressly authorized to "act as an agent . . . ." Finance Code §32.001(b)(2).3  In our opinion, this explicit agency authority fully empowers a state bank to act as an agent in all matters relating to financial activities, including insurance activities.

Further (again assuming the Insurance Code would permit a state bank to be licensed as a title insurance agent), in our view acting as a title insurance agent is incidental to the business of banking and additionally authorized by Finance Code §32.001(b)(1).  As a matter of prudent lending, title insurance is frequently required to protect the lender (as well as the borrower) from the prospect of economic loss resulting from a defect in the title to the property.  The ability to obtain necessary title insurance from an "in-house" source increases the ability of the bank to efficiently and capably make such loans, while generating additional revenue for the bank.

Because "a state bank may conduct any activity . . . through an operating subsidiary that a state bank or a bank holding company is authorized to conduct under the laws of this state if the operating subsidiary is adequately empowered and appropriately licensed to conduct its business," Finance Code §34.103(a),4 a state bank operating subsidiary may also sell title insurance as agent.  Whether the activity is engaged in directly or through an operating subsidiary, a license must first be obtained from the Texas Department of Insurance. See GLBA §34.104(b).

A state bank that chooses to conduct title insurance agency activities directly through the bank may expect close scrutiny from the Department of Banking to assure that the bank's safety and soundness are not impaired by the activity.

Opinion No. 00-02

A state bank is not required to possess trust powers to act as custodian of brokered certificates of deposit.

March 10, 2000

Sarah J. Shirley, Assistant General Counsel

I write in response to your letter to Everette Jobe, dated November 29, 1999, in which you seek our advice on behalf of your client, [***] Bank, [City] (Bank).

Question Presented

You ask whether the Bank must possess trust powers to act as custodian of brokered certificates of deposit.

Summary Response

The Bank is not required to possess trust powers in order to provide the custodial services specified in the agreement entered into between the bank and its customers with respect to brokered certificates of deposit.

Facts

As background, you explain that when the Bank was chartered in 1983, its articles of incorporation included "trust powers" as an enumerated power.  Thereafter, in 1992, at the insistence of the Federal Deposit Insurance Corporation, the Bank obtained regulatory approval to activate its trust powers in order to provide certain services in connection with an inter-governmental investment pool.  Although the Bank ceased providing these services in 1995, it did not seek to terminate its trust powers.  In 1996, the Bank purchased a trust company that had acted as custodian for brokered certificates of deposit, and began operating this business out of its "trust" division.  The Bank desires to transfer this custodial function to its commercial banking department, disband its trust division, and deactivate its trust powers.  You believe that the Bank's service as custodian is not a traditional fiduciary activity of the sort that requires the Bank to possess trust powers, and ask us to confirm that the Bank may continue to provide the subject services if it deactivates its trust powers.

You have submitted for our review the standard "Custodian Agreement" (Agreement) the Bank requires be executed in order to establish an account (Account) for the servicing of the brokered certificate of deposits (Deposits).  Under the Agreement, the person or entity that has an interest in the Deposits ("Customer") appoints the Bank to act as custodian of the Deposits and to receive principal and interest payments on the Customer's behalf and remit them to the Customer in accordance with the terms of the Agreement.  In addition to receiving and remitting payments, the Bank agrees to perform certain ministerial and recordkeeping duties with respect to the Account, such as providing the Customer with detailed account statements on a periodic basis.  The Customer specifically acknowledges that the Bank acts only as custodian, has no discretionary powers, and provides no advice regarding the Deposits.  The Agreement also limits the duties, responsibilities and liabilities of the Bank to those expressly set out therein.

You represent that, consistent with the terms of the Agreement, the Bank exercises no discretion, provides no advice, and "does not act in a traditional fiduciary capacity with respect to the brokered CDS."  It appears that the Bank's activities are limited to safely maintaining, preserving and accounting for the Account assets and performing certain ministerial acts in accordance with and as required by the Agreement.

Discussion

In order to answer your question, we must examine the nature of the relationship between the Bank and its Customers with respect to the Deposits.  We first consider whether it is an express trust or a similar trust-type relationship.  If it is, then the Bank must possess trust powers to provide the custodian services in question.  The term "trust" is generally considered to mean a fiduciary relationship with respect to property that arises as a result of a manifestation by the settlor of an intention to create the relationship and that subjects the person holding title to the property to equitable duties to deal with it for the benefit of another person.1  Thus, for a trust to exist, the settlor must manifest an intention to create, on behalf of a beneficiary, a beneficial interest in the property that is the subject of the trust.  While no particular words are necessary to create the trust, the settlor must fairly evidence his or her intention to do so.  Additionally, the legal and equitable titles to the trust property must be separated.  The legal title passes from the settlor to the trustee, and the beneficial or equitable interest to the beneficiary.  Moreover, the trustee must be subject to an equitable obligation to manage and use the trust property for the benefit of the trust beneficiary.  Implicit in the relationship is the trustee's duty and authority to act and exercise discretion on behalf of the beneficiary with respect to the trust property and matters coming withing the trust relationship.

We have reviewed the Agreement and considered your representations concerning the activities undertaken by the Bank pursuant to the Agreement, and have determined that no express trust or similar relationship exists between the Bank and its Customers in connection with the Account or the Deposits.  Nothing in the Agreement suggests that the Customer intends to create a trust.  The Bank has no substantive ownership interest in the Account assets or in the Deposits2 and, as a result, the requisite separation of ownership is absent.  Moreover, the Agreement neither authorizes nor requires the Bank to exercise any discretion with respect to the Account or the Deposits.  Accordingly, we conclude that the Bank does not act as a trustee when it provides the custodian services in question and need not possess the fiduciary powers of a trustee to do so.

We believe that the relationship between the Bank and its Customers is most appropriately characterized as a bailment coupled with an agency.  As a general rule, when a customer deposits property with a bank for safekeeping and gives the bank possession of the property, but not title, the Bank holds the property as bailee.  The extent of the bank's duties regarding the property entrusted to it depends upon the agreement between the bank and the customer.  Typically, the bank owes its customer the duty to use proper care to keep the property safely and to return it unharmed upon the customer's order.  The bank may, however, assume further duties in addition to simply holding the property, in which event it serves as the customer's agent as well as bailee.  With respect to securities held by a bank for its customers, for example, the bank may agree to act as the customer's agent to do such things as receive and issue receipts for the securities, collect principal and interest payments and disburse them according to the customer's directions, report all collections and disbursements to the customer, and execute the necessary papers required for income tax purposes.  As agent, the bank's actions are directed and controlled by the customer through the terms of the contract between the bank and the customer.3

The relationship between the Bank and its Customers has characteristics of both a bailment and an agency.  The Customers have entrusted the Bank with their property for safekeeping and preservation.  As noted previously, the Bank has no legal or equitable ownership interest in or right to the principal and interest payments that comprise the Account assets and, to the extent it holds legal title to the Deposits, the Bank does so only as its Customers' nominee.  Pursuant to the Agreement, the Bank has also assumed certain additional duties and serves as the Customers' agent to facilitate the collection and distribution of income from the Deposits and to perform certain ministerial or recordkeeping duties.  The Bank acts for and on behalf of its Customers and, through the Agreement, is subject to their control; the Bank performs no acts that are not specifically required or authorized by the Agreement.  The actual Account maintained by the Bank is best described as a typical custody or agency account, in which the agent is charged by the principal in the governing agreement with specific duties for the assets held in the account.  These duties do not involve management or investment responsibilities and do not require the agent to exercise discretion, but are instead limited to keeping the property safe and performing ministerial acts as directed by the principal.

Having determined that the Bank does not act as a trustee when it provides the custodian services in question, and that it therefore need not possess the trust powers required of trustees, we now consider whether the Bank must have trust powers to act as bailee or agent.  It is generally agreed that a bailment relationship is not one of a fiduciary nature.4  Accordingly, the Bank need not possess trust powers when it acts as bailee under the Agreement.  Nor do we believe that the Bank must have trust powers to provide the limited agency services specified in the Agreement.  While it is true that the relationship of agent and principal is a formal fiduciary relationship5, that fact alone does not compel the conclusion that the Bank must have trust powers to provide the custodian services in question.  Indeed, as a general rule, an agency is not considered to be a trust.6  To determine whether trust powers are in fact necessary, we again look at the scope of the agency and the nature and extent of the duties imposed upon and undertaken by the Bank pursuant to the Agreement.

As stated previously, the Bank has no investment or managerial responsibility and exercises no discretion with respect to the Accounts or the Deposits.  The Bank offers no advice.  Its duties and responsibilities are strictly confined to safely maintaining, preserving and accounting for the Deposits and the Account assets and performing specified ministerial and recordkeeping acts.  The Customer, through the Agreement, directs and controls the Bank's actions.  Given the limited nature of its authority and responsibility, we conclude that the Bank, although party to the formal fiduciary relationship that exists as a matter of law between any agent and its principal, need not possess trust powers to act as custodian of the brokered certificates of deposit.  The Bank may render the services the Agreement authorizes and requires it to perform pursuant to its incidental banking powers.7

There may well be instances in which the scope of a particular agency is such that an agent would act both as agent and trustee, and would be required to have trust powers to provide the services or engage in the activities called for in the agency agreement.  For example, an agent might need trust powers if the agreement authorizes him to exercise broad discretion on behalf of his principal.  We do not undertake in this opinion, however, to identify all the various activities that might require an agent to have trust powers.  Our answer is limited to the Agreement between the Bank and its Customers and the Bank's specific duties, responsibilities and liabilities thereunder.

As you know, the Bank's current articles of association authorize it to exercise the full range of trust powers permitted by law, and we assume that the Bank will amend its articles to reflect the "deactivation" of its trust powers.  We caution you, however, that even if the Bank's trust department is disbanded and its trust powers deactivated, our examiners will continue to carefully scrutinize the Accounts and Deposits to ensure not only that the Bank is properly handling them, but also that the Bank's duties, responsibilities and liabilities and the actual activities undertaken in connection therewith do not exceed those specified in the Agreement.

We further caution you that our determination that the Bank need not possess trust powers to provide custodial services in connection with brokered certificates of deposit is based upon the facts and circumstances set out in your correspondence with the Department and your telephone conversations with Department staff, and the specific terms of the Custodial Agreement submitted for our review.  Any change in those facts or circumstances, or in the terms of the Agreement, may result in a different conclusion.

Opinion No. 00-01

A state bank may help customer businesses establish their own websites, include advertisements on the bank's website for other businesses, provide hypertext links to the other websites, and charge reasonable fees for such services, including a transaction fee for purchases resulting from the bank's links.  A state bank may also provide website hosting and hypertext services to non-customers for a fee.

June 22, 2000

Sarah Shirley, Assistant General Counsel

By letter dated November 23, 1999 to Everette Jobe, you ask several questions about the authority of a state bank to engage in certain website-related activities.  You believe that Opinion No. 98-18 answers many of your questions, but request clarification with respect to several matters that are not specifically addressed in that opinion.

Questions Presented

You ask whether a state bank may help local businesses establish their own websites, include advertisements on the bank's website for other businesses, provide links to the other websites, and charge a transaction fee for purchases resulting from the bank's hypertext links.  You also ask whether you may provide these services to businesses that are not customers of the bank.

Summary of Response

A state bank may help customer businesses establish their own websites, include advertisements on the bank's website for other businesses, provide hypertext links to the other websites, and charge reasonable fees for such services, including a transaction fee for purchases resulting from the bank's links.  A state bank may also provide website hosting and hypertext services to non-customers for a fee.  We do not have sufficient information, however, to determine in this opinion whether a state bank may provide website design consulting services to businesses that are not bank customers.

Facts

It appears from your letter that American Bank of Commerce (Bank) currently operates a Bank webpage.  The Bank would like to help its customers establish their own websites and offer them the ability to advertise on and link their services from the Bank's home page.  The Bank proposes to charge each business a set-up fee and a monthly maintenance fee for these services, and also a referral or transaction fee for each purchase initiated through the links from the Bank's website.  Although the Bank intends to initially offer these services only to its customers, the Bank may wish at some point to offer them to non-customers as well.

Discussion

A state bank may engage in any activity authorized by the Texas Finance Code (the Code) or rules adopted thereunder, or determined by the Banking Commissioner to be closely related to banking. Tex. Fin. Code §32.001(b)(4) [now in substance §32.001(b)(6), pertaining to activities financial in nature, and (b)(7)].  Additionally, a state bank may exercise incidental powers necessary to carry on the business of banking. Tex. Fin. Code §32.001(b)(1).  The Bank may therefore engage in the subject activities if they constitute or are incidental to the business of banking, or if the Commissioner determines that they are closely related to banking.  Otherwise, the Bank will be precluded from engaging in these activities by §34.107, which prohibits a bank from investing funds in trade or commerce by selling or otherwise dealing in goods or owning or operating a business that is not part of the business of banking.

We first consider whether the Bank may provide the proposed services to its business customers.  The Department has previously addressed whether certain internet or technology related activities performed for a bank's customers constitute or are incidental to the business of banking and therefore do not violate the prohibition of §34.107.  In Opinion No. 95-72, we concluded that a bank that had in good faith acquired excess internet capacity for its own business purposes could sell the excess capacity to its customers.  We reasoned that the sale of its excess capacity was incidental to the bank's own use of its internet capacity, which was itself incidental to the business of banking.  Thereafter, in Opinion No. 98-18, we similarly determined that providing internet capacity for itself and its business customers was incidental to the business of banking and that, accordingly, a state bank could help its business customers design their own webpages and could also offer them the ability to link their services from the bank's homepage.  These prior opinions lead us to conclude that, assuming the Bank has acquired its excess capacity in good faith,1 the Bank may help its business customers with webpage design and provide hosting and hypertext link services without violating §34.107.  In addition, to the extent the Bank provides banking services to facilitate electronic commerce transactions directly through business customers' websites, such as through processing of credit card transactions,2 webpage design, web site hosting services, and hypertext link services are directly incidental to banking and may be offered without being limited to existing excess capacity.

We believe that 7 T.A.C. §11.83(d) provides further, and independent, authority for our conclusion that the Bank may offer the proposed services to its customers.  Section 11.83(d) permits a state bank, upon request, to act as "finder" in bringing together a buyer and a seller where the bank's activity is limited to the introduction and the bank takes no part in the negotiations.  Acting as finder thus constitutes the business of banking.  When the Bank offers and provides the proposed website hosting and hypertext services, it provides information to prospective buyers about the goods and services offered by prospective sellers, and in so doing helps bring the parties together for a transaction that they themselves then negotiate and consummate.  The Bank acts as finder, and merely uses new technology to conduct the finder activities authorized pursuant to §11.83(d). See Opinion No. 99-11 (acting as finder is part of the business of banking).3  Additionally, §11.83(d) specifically permits a bank to accept a fee for the provision of finder services.  We therefore conclude that the Bank may not only provide website hosting and hypertext services for its customers, but may also collect a referral fee for resulting purchase or sale transactions.

We next consider whether the Bank may provide the proposed website related services to businesses that are not current bank customers.  Section 11.83(d) does not limit the potential buyers and sellers for whom a bank may act as finder; there is no requirement that finder services be provided only to the bank's customers.  Accordingly, we conclude that the Bank may provide website hosting and hypertext services to both customers and non-customers and charge a reasonable fee for therefor.

Whether the Bank may provide website design consulting services for non-customers poses a more difficult question.  We recognize that evolving technology and the expanding definition of financial activity and the role of banks in commerce require us to constantly re-evaluate what constitutes or is incidental to the business of banking.  An argument can be made that offering website design assistance to non-customers is merely incidental to the Bank's authority to act as finder, is a form of advertising to attract customers, or simply enables the Bank to make use of the excess software, hardware and expertise it has acquired for its own purposes or to better serve its customers.  However, acting generally as a website design consultant neither constitutes nor is incidental to the business of banking, and we are concerned that the active marketing of website design services to non-customers may be an independent commercial activity of the sort that section 34.107 is intended to prohibit.  Moreover, we question whether the Bank, as a byproduct of providing web-based banking services and retail website hosting services, is likely to have sufficient website design excess capacity to justify the offering of design services to non-customers.

We find that we do not have sufficient information regarding the Bank's proposal to offer website design consulting services to non-customers to answer that aspect of your question.  If you wish us to determine whether the Bank may provide such services to non-customers, please provide in writing the details of how the services will be offered and rendered.  The information you furnish should also include a description of the hardware, software and staffing you currently devote to or have available for website design, the purposes for which it was acquired, and the purposes for which it is presently used.  Additionally, please describe any restrictions contained in your website design software licensing agreement regarding its use by third parties.  Once we receive this information, we can fully evaluate the Bank's proposal and address the concerns we have identified above.

With respect to those activities we have determined to be authorized, safety and soundness must be considered.  The security of the Bank's computer system must remain inviolate and thoughtful precautions should therefore be taken to ensure that the system is insulated from viruses and unauthorized access to information.  In addition, the Bank should carefully analyze the risks presented by the proposed activities, particularly compliance and reputation risks, and take appropriate steps to minimize and manage such risks.  For example, consideration should be given to the Bank's and the third-party vendors' compliance with the various federal and state statutes and regulations that may apply to the linked services and products, such as Regulations Z and DD.4

Additionally, the Bank should consider the need for disclosures to make clear when non-banking services are being offered by third parties and not by the Bank.  The Bank should exercise prudence in the manner of presenting web-based advertising or linkage to avoid any perception that it endorses or guarantees or is in any way responsible for any third party vendor product or service, or that the products offered are insured by the FDIC.  The Bank should also exercise appropriate controls and engage in the subject activities pursuant to written agreements, including web linking agreements, that define the obligations of the parties and appropriately allocate risk.  Complete files of the activities should be maintained for examination purposes.  We also recommend that the Bank notify its bonding company of the new services it intends to provide.  We further suggest that the Bank review the Comptroller of the Currency's Handbook, Other Income Producing Activities, Internet Banking (October 1999), which provides guidance to national banks that are conducting or considering internet banking activities, available on the OCC's website at http://www.occ.treas.gov.

Finally, we note that the Texas Comptroller of Public Accounts has stated in recent letter rulings that any charge for providing advertising space on a website is subject to Texas sales tax.5  It thus appears that a bank that sells such space on its website must collect the Texas sales tax from the advertising customer and remit it to the Comptroller.  During the last legislative session, the Texas Legislature enacted Senate Bill 441,6 portions of which address the extent to which taxes for internet related services, including website advertising, must be collected and remitted.  The relevant provisions are codified in Chapter 151 of the Texas Tax Code.  Pursuant to SB 441, eighty percent (80%) of the value of the advertising space is subject to the Texas sales tax.  Pursuant to other provisions of Chapter 151, a Texas sales tax need not be collected if the customer seeking to advertise on the webpage is located outside of the State of Texas.  If the customer has business locations both within and outside the state, however, the customer must issue to the bank an exemption certificate asserting a multi-state benefit and reporting and paying the tax on the portion of the advertising charge that will benefit the Texas location.  We urge you to carefully review the relevant provisions of Chapter 151 to ensure that the Bank complies with Texas sales tax law in connection with its website hosting and advertising activities.

This opinion is limited to the facts and circumstances described in your letter.  Any changes could result in a different conclusion.

Opinion No. 99-40

The portion of a properly made and documented loan that is unconditionally guaranteed by the Texas Film Industry Administrative Fund is exempt from the legal lending limit.

January 25, 2000

Steve Martin, Assistant General Counsel

By letter dated October 27, 1999, you requested our opinion as to whether the portion of a loan guaranteed by the Texas Film Industry Administrative Fund (Fund) is counted toward a bank's legal lending limit.  Please accept our apologies for the long delay in responding to your request.  Due to circumstances beyond our control, the Legal Division of the Department of Banking has been seriously understaffed since August, and has only recently achieved full staffing through the hiring of additional attorneys.

Analysis

Pursuant to §34.201(a) of the Texas Finance Code, the total loans and extensions of credit outstanding at any time by a state bank to one borrower may not exceed 25% of the bank's capital and certified surplus.1  However, this limitation does not apply to "the portion of an indebtedness that this state, an agency or political subdivision of this state, the United States, or an instrumentality of the United States has unconditionally agreed to purchase, insure, or guarantee." Tex Fin. Code §34.201(a)(8).2

To determine if the exemption created by §34.201(a)(8) applies in the instant case, we look, first, to discern whether the loan is guaranteed by one of the described governmental entities and, second, whether such guarantee is unconditional.  The Fund was created by the Texas Film Industry Development Loan Guarantee Program Act, codified as Subchapter N of Chapter 403 of the Government Code (Act).  The Fund is described as "a state program of loan guarantees to promote the film industry in this state."  The Act further provides that the Fund "is an account in the general revenue fund." Tex. Gov't Code §403.323(a).  The program and Fund are administered by the state Comptroller. Id. at §403.324.  All indications of the Act point to the loan guarantee program being guaranteed by the State.

We previously reviewed the characteristics of an unconditional guarantee in Opinion 97-12 (October 14, 1997).  In that opinion, we analyzed §34.201(a) of the Texas Finance Code and concluded that most programs of the guarantor, the Export-Import Bank of the United States, did fall within the exemption language as "unconditionally guaranteed."  The Banking Department addresses this requirement of the guarantee being unconditional in 7 TAC §12.6(f) which provides, in pertinent part:

A takeout commitment, insurance, or guarantee is considered unconditional if the protection afforded the bank is not substantially diminished or impaired if the loss should result from factors beyond the bank's control.  Protection against loss is not materially diminished or impaired by procedural requirements such as an agreement to take over only in the event of default, including default over a specific period of time, a requirement that notification of default be given within a specific period of time, a requirement that notification of default be given within a specific period after its occurrence, or a requirement of good faith on the part of the bank.

We have found nothing in the Act which would cause a loan made pursuant to the Act to be anything other than "unconditional" as above defined.

The rule also provides that a guarantee is not considered unconditional unless the commitment or guarantee is payable only in cash or its equivalent within 60 days after demand for payment is made.  Neither the Act nor the rules promulgated under the Act by the Comptroller (34 TAC §§1.330-332) address procedures for a bank seeking to enforce or secure payment on a loan agreement.  Further, we have been provided no facts pertaining to this issue.  We assume for purposes of this opinion that this requirement of 7 TAC §12.6(f) is met.

Conclusion

Subject to our assumptions, we conclude that the legal lending limit of §34.201(a) of the Texas Finance Code would not apply to that portion of a properly made and documented loan that is guaranteed by the Texas Film Industry Administrative Fund.

Our conclusion should not be construed as an endorsement of the proposed loan.  A bank must heed the underlying purpose of the legal lending limit, reduction of risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of the state bank's funds.  Further, while a bank is clearly empowered to make loans as described in this opinion in an amount well in excess of the bank's legal lending limit, the bank in question must have the ability, capacity, and commitment to appropriately evaluate and manage the risks inherent in such lending activities.  Thus, these types of loans will be closely scrutinized by an examiner to monitor the bank's adherence to its policies and procedures and to ensure that the bank is administering such loans in a manner that is consistent with safe and sound banking practices.

Finally, this opinion is limited to the facts and circumstances set forth in your letter of October 27, 1999.  Any change in those facts, circumstances, or the stated assumptions underlying our opinion may result in a different opinion.

Opinion No. 99-39

A change in control of a holding company that owns a state trust company requires the prior approval of the banking commissioner.

November 24, 1999

Loren E. Svor, Assistant General Counsel

In an October 22, 1999, letter to Acting Banking Commissioner Randall S. James, you requested our concurrence with your conclusion that a proposed corporate acquisition involving [***], Inc. ("Holding Company"), resulting in a single shareholder beneficially owning 19.6% of Holding Company, would not require the approval of the Banking Commissioner (the "Commissioner"), pursuant to Finance Code, chapter 183, as a change in control of [***] ("Trust Company"), a Texas state-chartered trust company and wholly-owned subsidiary of Holding Company.  For the reasons set forth below, we cannot concur with your conclusion.  In our opinion, the proposed transaction involves a change in control of a state trust company, and requires the prior approval of the Commissioner pursuant to Finance Code, Chapter 183.

Background

As set forth in your letter, the pertinent facts relating to the proposed transaction are as follows:

1.   Trust Company is presently a wholly-owned subsidiary of Holding Company and will remain so after the proposed transaction.

2.   Holding Company is proposing to acquire [***], Inc. ("XYZ"), a [State]-based investment banking firm.  The acquisition will involve the exchange of the *** outstanding shares of XYZ common stock for a like amount of Holding Company.  These shares of Holding Company will be additions to the existing common capitalization of Holding Company of *** shares.

3.   Before the acquisition, the largest single shareholder of Holding Company beneficially owns 4.7% of voting stock; after the acquisition, the single largest shareholder will beneficially own 19.6% of voting stock.

Analysis

Finance Code §183.001(a) requires the prior written approval of the Commissioner before a person directly or indirectly acquires a legal or beneficial interest in voting securities in a state trust company or a corporation owning the voting securities in a state trust company if after the acquisition the person would control the state trust company.  "Control" is defined in Tex. Fin. Code §181.002(a)(13), which reads, in pertinent part:

(A) the ownership of or ability or power to vote, directly, acting through one or more other persons, or otherwise indirectly, 25 percent or more of the outstanding shares of a class of voting securities of a stat trust company or other company;

(B) the ability to control the election of a majority of the board of the state trust company or other company; [or]

(C) the power to exercise, directly or indirectly, a controlling influence over the management or policies of the state trust company or other company as determined by the banking commissioner after notice and an opportunity for hearing . . . .

Additionally, for the purposes of Subchapter A, Chapter 183 (relating to Transfer of Ownership Interest), a "principal shareholder" is considered to control the company if the shareholder "directly or indirectly owns or has the power to vote a greater percentage of voting securities of the state trust company than any other shareholder," Tex. Fin. Code §181.002(b).  A "principal shareholder" is a person "who owns or has the ability or power to vote, directly, acting through one or more other persons, or otherwise indirectly, 10 percent or more of the outstanding shares or participation shares of any class of voting securities of a state trust company or other company." Tex. Fin. Code §181.002(a)(38).

"Control" of a state trust company can therefore take place at any level of stock ownership if a shareholder has the ability to control the election of a majority of the board or exercises a controlling influence over the management or policies of the trust company.  This constitutes actual or de facto control.  Alternatively, "control" can result from the direct or indirect ownership of 25 percent or more of the voting shares of the trust company or other company, regardless of whether the shareholder is the largest shareholder, and from the ownership of 10 to 25 percent of voting shares if no other shareholder has a greater interest.  This constitutes de jure control, or control as a matter of law, and exists without regard to whether such a shareholder exercises actual control over the trust company.

It is important to recognize that ownership of the stated percentages of the voting stock of a company, such as Holding Company, which owns the voting shares of a state trust company, also results in de jure control of the trust company.  Tex. Fin. Code §183.001(a) explicitly states that acquisition of control includes acquiring, directly or indirectly, a beneficial, as well as a legal interest in the voting shares of a trust company, or of a company owning voting securities in a state trust company. See also 7 Tex. Admin. Code §21.51(a).  The statutory definitions of "control" quoted above also refer to interests owned indirectly, as well as directly.  Share ownership in a company that owns stock in a state trust company results in an indirect or beneficial ownership by the parent company shareholders of stock in the trust company.  In the case of a company that owns 100 percent of the voting securities of a state trust company, such as Holding Company, control of the company, as defined above, is control of the trust company.

Before the acquisition of XYZ, Holding Company has no principal shareholders, and therefore no shareholders that would be considered to control Trust Company (assuming that none of the other indices of control set forth in Tex. Fin. Code §181.002(a)(13) exist).  However, after the proposed acquisition, the largest shareholder would own or control 19.6 percent of Holding Company, and thus would indirectly own 19.6 percent of Trust Company.  Notwithstanding your argument that no actual change of control would take place — presumably because Holding Company's current officers and directors beneficially own over 25 percent of Holding Company (although this percentage would increase to over 49 percent) and management would be essentially the same — the statute, not practical considerations, determines when a de jure change of control has taken place.  The situation you describe will result in a change of control of Trust Company, a state trust company, and the acquisition requires the prior written approval of the Commissioner. Tex. Fin. Code §183.001.  If Holding Company desires to proceed with this transaction, it will be necessary for the transferee (the proposed principal shareholder) to file with the Department of Banking an application which meets the requirements of Tex. Fin. Code §183.003, and to publish the notice specified in that section (unless waived by the Commissioner).

Before closing, I will briefly to comment on your argument that the statutory change of control procedures are not reasonably manageable when applied to a publicly-traded company.  In making this argument, you used as a hypothetical a situation in which the largest shareholder of a company owns 0.5 percent of the company.  You then argue that if any other shareholder were to acquire just one share more than 0.5 percent of the company, a change of control application would be required, even though an ownership amount of that size could not result in actual control.  The flaw in your argument is your belief that the largest shareholder, however small the amount, is the "principal shareholder." As set forth above, a "principal shareholder" is one that owns at least 10 percent of the voting stock.  Therefore, in your hypothetical, no change of control issues would arise until a shareholder acquired at least 10 percent of voting shares, not one share over 0.5 percent as you argue.  In a corporation with millions of shares and thousands of shareholders, it is not unreasonable to expect that a single shareholder concentration of that magnitude could convey effective control, as I believe most experts on modern corporate governance would agree.  However, as discussed above, regardless of whether actual control results, the statute establishes an irrebuttable presumption of control at certain stock ownership levels, as well as establishing circumstances that constitute actual control regardless of the amount of stock owned.

Opinion No. 99-38

A "deputy" granted a right of access to a safe deposit box retains that right upon the death or incapacity of the lessee except to the extent the lease agreement explicitly provides otherwise.

November 29, 1999

Loren E. Svor, Assistant General Counsel

By letter dated September 6, 1999, you have asked us to address several questions to clarify the meaning of Finance Code, §59.106, concerning access to a safe deposit box by more than one person.  Your questions generally concern the extent to which a contract can vary the rights of access of persons other than the lessee from those set forth in §59.106.  As we will discuss in more detail below, we generally view §59.106 as setting forth default provisions which control only if they are not addressed in the contract.  Consequently, any provisions of §59.106 can be modified by an appropriately worded contract.

Analysis

Finance Code, §59.106 reads:

(a) If a safe deposit box is leased in the name of two or more persons jointly or if a person other than the lessee is designated in the lease agreement as having a right of access to the box, each of those persons is entitled to have access to the box and to remove its contents in the absence of a contract to the contrary.  This right of access and removal is not affected by the death or incapacity of another person who is lessee or otherwise entitled to have access to the box.

(b) A safe deposit company is not responsible for damage arising from access to safe deposit box or removal of its contents by a person with a right of access to the box.

By its terms, §59.106 states that a lessee (lessees), or other persons which may be designated by the lessee(s) in the lease agreement, each have an absolute right to access the box and remove its contents, unless the lease agreement explicitly states otherwise.  This right is unaffected by the death of any other person with a right of access.  However, we believe that the provision in the first sentence of §59.106(a) relating to varying the right of access by contract also applies to the second sentence, and that an explicit contractual term providing for termination of access rights of a person upon the death of another person is consistent with the statute.

Given this, your specific questions may be answered as follows:

1.  Does the phrase "people other than the lessee designated in the lease agreement" refer to a deputy appointed on a safe deposit rental lease?

     Yes.  My understanding of the term is that a "deputy" is a person designated to have an access right as a matter of convenience to the lessee(s) or in the event of incapacity of the lessee(s); perhaps a relative.  A "deputy" in this context is conceptually similar to a "cosigner" on a convenience deposit account, conveying a right of access to the account but no ownership rights. See Tex. Probate Code §438A.  Since a "deputy" is given a right of access to the box by the terms of the lease agreement, the deputy would be a person, other than the lessee, who is designated in the lease agreement as having a right of access.

2.  Does the law state that this appointed deputy would have access to the box after the renter dies or becomes incapacitated unless there is a contract to the contrary?

     Yes.  Since a "deputy" is a person with a right of access, the plain terms of the statute provide that the access right is unaffected by the death or incapacity of a lessee, unless the contract provides otherwise.

3.  Please define and/or provide an example of a "contract to the contrary."

      We will leave the precise wording to your attorney.  However, a simple statement in the lease agreement, in the section relating to the appointment of the deputy, that any right of access of that person terminates upon the death (or incapacity, if desired) of the lessee (or of a joint lessee) should suffice.  I would suggest that care be exercised in drafting such a provision, however, because of the liability which could follow from allowing a deputy access to a box subsequent to the death of a lessee, but of which the bank has no knowledge.  This problem is compounded in that, in contrast to the situation discussed in question 6, below, the deputy probably will not be motivated to provide evidence of the lessee's death.

4.  If an existing lease now states that a deputy's power ceases upon the death of a renter, should this language be changed?

      Nothing in §59.106 would compel such a change.  However, the issue discussed in the previous answer should be considered.

5.  Should a rental lease have two sections: One to appoint a deputy and another to designate a person on a lease?

     Section 59.106 is silent on the form of the contract; this is a matter for the drafting attorney.  However, the question seems to imply a distinction which does not exist under the statute.  A "deputy" is "a person on a lease."  Other than the lessee, the access rights of any other person can be altered by the terms of the contract.  A distinction between a "deputy" and a lessee is necessary, but not between a "deputy" and any other person given a right of access only by the terms of the agreement.

6.  Does this law permit a renter to set up a "payable on death" clause on the lease that will name an individual to have access to the box only after the renter's death?

      Assuming that the reference to "payable on death" is meant only as an illustration of a right which arises only upon the death of the person granting the right, there is nothing in §59.106 which would preclude such a provision in a lease agreement.  If such a provision is included, I would suggest that the agreement be very specific concerning the evidence of the death of the lessee that will be required before access is granted to the designee.

7.  If this law does not appear in a bank's safe deposit rental lease, should it be added?

      Again, this is matter of form to be determined by the drafting attorney.  I know of no reason why the statute would need to be included in the lease.

8.  If the bank decides not to permit the renter to designate a person to have access to the box, other than the lessee, are they in violation of this law?

      Section 59.106 does not require that a person be designated to have access to the box.  This is purely a contractual matter between the bank and the lessee.  As a party to the contract, the bank may negotiate whatever terms it desires, including that only the lessee will have access to the box.

Opinion No. 99-34

In a liquidation of a foreign bank branch or agency [or another regulated financial institution], the banking commissioner would not seek to repudiate executory contracts to recover assets previously sold by the branch or agency [or another regulated financial institution] as part of an asset securitization transaction, or to hinder the restructuring of any servicing arrangements of which the branch or agency [or another regulated financial institution] was a part, provided that the original asset transfer was part of a "bona fide sale" for which fair and adequate consideration had been received.

October 25, 1999

Loren E. Svor, Assistant General Counsel

By letter dated August 3, 1999, you requested our concurrence with your opinion on certain matters related to the (hypothetical) liquidation of a Texas foreign bank branch or agency as such would affect a securitization of certain loan or lease assets of the agency or branch.  Specifically, you have asked us to concur with your conclusions that:

1.  Where a Texas state branch or agency (the "Texas Branch") of a foreign bank (the "Bank") has transferred, for fair and adequate consideration and without recourse to the Texas Branch, its rights to receive payments of principal and interest (the "Payment Obligations") on account of certain loans or advances (the "Eligible Loans") arising under certain commercial or industrial loan or lease agreements or facilities (the "Designated Loan Agreements") selected from a portfolio owned by it, and where the Texas Branch continues to service the loans as a subservicer for such Eligible Loans, the Payment Obligations would not be assets of the Texas Branch that would be available to the Banking Commissioner or a receiver (the "Commissioner") to satisfy claimants who had transactions with the Texas Branch; and

2.  A court would not grant an order consolidating the assets and liabilities of the Funding Trust (as defined below) and the Texas Branch so as to deal with them as if such assets were held by, and the liabilities incurred by, a single entity.

In addition you have requested our agreement that:

1.  The Commissioner would not seek to prevent the appointment of any substitute subservicer pursuant to the subservicer agreement with the Servicer (as defined below) relating to the proposed transaction in the event the Commissioner were to take possession and control of the Texas Branch and its business and property; and

2.  The Commissioner would not seek, pursuant to Tex. Fin. Code §204.120, to "stop or limit" the Texas Branch's remittance of principal, interest, or fees under the Eligible Loans to the Funding Trust as subservicer of the Eligible Loans by any means, including repudiation of the grant by the Texas Branch of a power of attorney to the trustee of the Master Trust described below (the "Trustee") that allows the Trustee, following the Commissioner's taking possession and control of the Texas Branch, to direct the obligors on the Eligible Loans to send payments directly to an account held by the Trustee.

Description of Proposed Transaction

The Financing Program.  The transaction involves the securitization of the Payment Obligations owned by the Texas Branch, as well as Payment Obligations owned by out-of-state branches of the same parent foreign bank (the "Sellers").  Sellers have established a special purpose Delaware business trust (the "Funding Trust") pursuant to an agreement between the Sellers and an independent trustee.  The Sellers, excluding the Texas Branch, will hold the equity interests in the Funding Trust which will be evidenced by Funding Trust certificates (the "Funding Trust Certificates").  The Texas Branch may also hold Funding Trust Certificates if the investment is subsequently approved by the Commissioner.

The trustee of the Funding Trust will not be affiliated with Sellers or the Bank, and will conduct the Funding Trust's operations separately from the Sellers or the Bank.  Each Seller will sell a 100 percent participation interest in the Payment Obligations owned by it, either through origination or transferred from other U.S. branches or agencies of the Bank, to the Funding Trust, pursuant to separate agreements between each Seller and the Funding Trust (the "Participation Agreements").  The Participation Agreements will clearly express the intention of each party that the transaction is a sale rather than a secured borrowing, and will not provide, nor will any other agreement with respect to the transaction provide that the Seller is obligated to repurchase the transferred assets or compensate the Funding Trust in any way should the underlying Eligible Loan(s) default.  As a result, the Payment Obligations of the Texas Branch in which the participation interest is sold will no longer appear as assets on the books of the Texas Branch.

The Funding Trust will sell to another Delaware business trust (the "Master Trust") a 100 percent subparticipation interest in its 100 percent participation interest in the Payment Obligations acquired from the Sellers.  The Master Trust will issue notes secured by the assets of the Master Trust (the "Notes"), along with certificates (the "Certificates," and collectively with the Notes, the "Securities").  The Certificates, along with a Transferor Certificate, which represents any portion of the beneficial interest ownership interest in the Master Trust not represented by the Securities, are retained by the Funding Trust.  The Master Trust will deliver the net proceeds of any sales of the Notes to the Funding Trust as payment for the subparticipation agreement received from the Funding Trust (in addition to the Certificates and the Transferor Certificate).

Servicing.  An out-of-state branch or agency of the Bank (the "Servicer") will service all of the Eligible Loans relating to the Payment Obligations, including those owned by the Texas Branch, pursuant to an agreement between and among the Indenture Trustee, the Master Trust, and the out-of-state branch or agency (the "Servicing Agreement").  In exchange for a fee (the "Servicing Fee"), the Servicer will collect the payments and remit them to a collection account established by the Servicer at an unaffiliated bank in the name of the Trustee.  The Servicer may appoint subservicers to subservice the Eligible Loans.  An out-of-state branch or agency of the Bank will, and upon any necessary approval by the Commissioner, the Texas Branch will, subservice, or appoint a subservicer for, the Eligible Loans originated by or transferred to the Texas Branch and for which the Payment Obligations were sold to the Funding Trust.  Pursuant to the Servicing Agreement, the Servicer may, but will not be required to, advance to the Master Trust scheduled payments of interest due on the Payment Obligations but not received by the applicable due date.1

Analysis

Pursuant to Finance Code, §204.120(b), the liquidation of a Texas branch or agency of a foreign bank is governed by Finance Code, ch. 36, as if the entity were a state bank.2  Among the powers of a receiver under chapter 36 is the repudiation of executory contracts pursuant to Tex. Fin. Code §36.215.  Because a securitization transaction is completely structured pursuant to contract, the possibility exists that the Commissioner's power to repudiate such contracts of a Texas Branch in liquidation and, perhaps, thereby attempt to reach the transferred assets could impair the satisfaction of the "legal isolation" requirement of Statement of Financial Standards No. 125, as promulgated by the Financial Accounting Standards Board, which is necessary in order for the asset transfer to be treated as a sale in accordance with generally accepted accounting principles ("GAAP").

The purpose of giving the Commissioner or a receiver the power to terminate contracts is to prevent continuing obligations and duties imposed on the Texas Branch by such contracts from burdening the liquidating estate or its administration.  We do not believe that it was the intent of Finance Code, §36.215, to provide a means for the Commissioner or receiver to recover assets which have been transferred by the Texas Branch in a bona fide sale, and for which fair and adequate compensation was received at the time of the transfer.  We consider a bona fide sale to exist when:

1.  The transaction meets all of the requirements for sale accounting under GAAP, with the exception of "legal isolation" only as it may be adversely affected because of the power of the Commissioner or receiver to terminate contracts as discussed above;

2.  The contracts and other documents effecting the transfer clearly reflect the intention of the parties to treat the transaction for accounting purposes as a sale and not a secured borrowing;

3.  The transfer is without recourse, meaning that it is not subject to an agreement that the seller repurchase the buyer's interest or otherwise compensate the buyer upon the default on the underlying obligation; and

4.  The transaction is with an entity with a distinct standing at law separate from the Texas Branch, and which is primarily engaged in acquiring and holding financial assets for the purpose of issuing securities representing beneficial interests in the assets, or in transferring such assets to another such special purpose entity for that purpose, and activities incidental to such purpose.

Based upon your representation of the facts of the transaction to be engaged in by Texas Branch, as set forth in your letter and subsequent telephone conversations, and as described above, it appears that these requirements will be met.  Consequently, we concur with your conclusions that:

1.  Under the represented facts, the Payment Obligations would not be considered assets of the liquidating Texas Branch available to the Commissioner to satisfy claimants who had transactions with the Texas Branch; and

2.  The Commissioner would not seek, nor would a court grant an order consolidating the assets and liabilities of the Funding Trust and the Texas Branch so as to deal with them as if the assets were held by, and liabilities incurred by a single entity.

With respect to the two propositions on which you have requested our agreement, the Department's position is:

1.  To the extent that the subservicing rights have value, and given that the right to appoint an alternate subservicer would be granted to the Texas Branch, the designation of the alternate subservicer would be an asset of the liquidating Texas Branch and the Commissioner would reserve the right to dispose of it in a manner that would provide the greatest benefit to the liquidating estate.  Subject to that reservation, the Commissioner would not unreasonably obstruct designation of an alternative subservicer by the Servicer, nor would the Commissioner designate an alternate subservicer as successor to the Texas Branch's authority to do so over the reasonable objections of the Servicer; and

2.  We agree that the Commissioner would not seek to "stop or limit" the normal remittance of payments under the Eligible Loans by any means, including repudiation of the power of attorney granted by the Texas Branch to the Trustee that allows the Trustee to direct the obligors on the Eligible Loans to send payments directly to an account held by the Trustee.

Other considerations.  The opinions expressed herein are limited to the facts as represented and the law as it presently exists; a change in either could result in a different opinion with respect to a subsequent transactional circumstance.  Consequently, this opinion should not be interpreted as a general statement controlling the Commissioner's administration of the liquidation of a foreign bank branch or agency when a securitization or participation transaction is involved.  Rather, each such situation will be dealt with on a case-by-case basis.  Finally, the opinions expressed above do not constitute a waiver of the Commissioner's right to avoid a transfer pursuant to Tex. Fin. Code §36.216, or any other applicable law dealing with fraudulent transfers, nor do they, except as expressly stated, constitute a limitation of the Commissioner's or receiver's power to terminate executory contracts.

Opinion No. 99-31

The Texas Business Combination Law applies to a business combination involving a state bank unless its application would interfere with regulatory resolution of a bank in hazardous condition.

July 28, 1999

Loren E. Svor, Assistant General Counsel

By fax dated July 21, 1999, you asked our opinion whether a proposal by several present stockholders (the "Organizers") of [***] State Bank of [City] (the "Bank") to acquire control of the Bank through a stock purchase pursuant to contract and tender offer, and thereafter arrange an exchange of all of the Bank shares for shares of [***] Bancshares (the "Holding Company"), a one-bank holding company now in organization, would be a transaction prohibited by the Texas Business Combination Law (Texas Business Corporation Act ("TBCA"), Part 13) ("TBCL").  Based on the facts as we understand them which are set forth below, it is our opinion that while the proposed acquisition of Bank stock by the Organizers is not prohibited by the TBCL, the subsequent share exchange of Bank stock for Holding Company stock would be subject to the TBCL and could not be done for three years after the Organizers became an "affiliated shareholder," as defined in the TBCL, unless approved by affirmative vote of two-thirds of the stock not beneficially owned by the Organizers.

Based on copies of the proposal submitted to the Federal Reserve Board by the organizers of the Holding Company, we understand the facts of the transaction, in pertinent detail, to be as follows:

•    Five of the present officers and directors of the Bank (the "Organizers") will acquire at least two-thirds of the common stock of the Bank.  The Organizers at present hold 12.45 percent of the outstanding common stock.

•    The remainder of the target amount of stock will be acquired as follows:

•  *** shares (10.44 percent) will be purchased from the retiring President of the Bank pursuant to a negotiated contract which was entered into in November, 1998; and

•  Additional shares to equal two-thirds (*** shares or 43.8 percent) will be acquired through a tender offer to the other shareholders.

•  Both the tender offer and the contract to purchase the President's shares are contingent upon the Organizers owning at least two-thirds of outstanding shares upon completion of the purchases.

•  The tendering of shares pursuant to the offer conveys the right to vote the shares immediately upon acceptance of the offer by the Organizers for the purpose of exchanging the shares for shares of the Holding Company.

•  After acceptance of the tender of the requisite number of shares (or more), the Bank will approve a share exchange of all the Bank shares for shares of the Holding Company, which, after resolving any dissenter claims, would result in the Holding Company owning 100 percent of the Bank stock.

Analysis

A.  The TBCL applies to a business combination involving a state bank unless the business combination is undertaken to reorganize a bank in a hazardous condition.

The TBCL, as part of the TBCA, potentially applies to a state bank.  Finance Code §32.008(a) and (b) state that the TBCA applies to a state bank "to the extent not inconsistent with this subtitle [Finance Code, Title 3, Subtitle A] or the proper business of a state bank. . . ." or rules1 adopted to limit, refine, alter, or supplement the requirements of the TBCA as they may otherwise apply to a state bank.  The Finance Code and related rules require the prior approval of the Banking Commissioner (the "Commissioner") before a state bank may undergo a change in control or other form of corporate reorganization. See Finance Code §33.001 (change of control), §32.401 (purchase of assets of another financial institution), §§34.405 and 36.101 and 7 Texas Administrative Code ("TAC") §15.106 (sale of all or substantially all assets), and §32.301 and 7 TAC §15.104 (merger or share exchange).  In our opinion, application of the TBCL is not inconsistent with the requirement for prior approval of the Banking Commissioner for a business combination involving a state bank that meets the statutory definition of "issuing public corporation," except in the limited case of resolving a state bank that is in a hazardous condition through a forced merger or other reorganization.

In general terms, the Finance Code contemplates that the TBCA will apply in matters related to corporate structure or governance, subject to any required approval by the Commissioner prior to consummation of the transaction.  For example, Finance Code §32.008(c) states that unless expressly excepted by statute or rule, a state bank wishing to take any action authorized by the TBCA with respect to its corporate status, capital structure, or corporate governance, and which would require a filing with the secretary of state if the bank were a business corporation, must make the filing with the Commissioner and obtain the Commissioner's approval.  Finance Code §32.301 requires that a merger must be implemented by the parties and the approval of the board and shareholders of the parties obtained in accordance with the TBCA, and 7 TAC §15.104 requires authorization of a merger or share exchange by the board and shareholders in accordance with the TBCA.  Pursuant to 7 TAC §15.106, a sale of all or substantially all assets when the bank intends to remain in business must be approved by the board and shareholders in accordance with the TBCA.  Although the referenced actions also require the approval of the Commissioner, these provisions indicate that the required compliance with the TBCA is not inconsistent with the Finance Code, Title 3, Subtitle A, but is instead a prerequisite to Commissioner approval.

A further indication that the TBCL is not inconsistent with the Finance Code and related rules may be seen in the different focus of the respective statutory provisions.  The TBCL was intended to protect the shareholders of a corporation from an involuntary alteration of their corporate rights when the action is or could be influenced by other shareholders with a specified level of control.  The Finance Code and related rules, on the other hand, require Commissioner approval of the same acts in order to protect the public and the viability of the bank itself.  Thus, a merger or share exchange will be approved by the Commissioner if the resulting state bank will be solvent and adequately capitalized, all liabilities of a state bank participating in the merger have been discharged or assumed, a resulting state bank will not be engaged in a business other than banking or a business incidental to banking, and the parties have complied with the laws of Texas, the only required findings stated in Finance Code §32.302 and 7 TAC §15.104.  The absence of any stated concern for bank shareholders indicates that their interests in a corporate restructuring are sufficiently protected by the requirements of TBCA, including the potential exercise of dissenter's rights and any required vote of shareholders (including a required vote under the TBCL).  Indeed, prior to August 26, 1985, a merger involving a state bank could only be approved if the Commissioner concluded that the proposed merger was "to the best interest of the depositors, creditors and stockholders of the merging banks and of the public in general [and] that the distribution of the stock of the resulting bank is to be upon an equitable basis...." (Former art. 342-308 of the Texas Banking Code).  These quoted requirements were deleted in 1985 in connection with the addition of dissenters' rights to the Texas Banking Code, determined with reference to the TBCA; Act of May 27, 1985, 69th Leg., ch. 639, §7, 1985 Tex. Gen. Laws 2366, 2368 (Vernon).

The Finance Code and its related rules clearly place the burden of protecting shareholder's rights on the TBCA2 and, except for certain actions relating to banks that are insolvent or threatened with insolvency, require that TBCA requirements be satisfied.  The TBCL presents the additional requirement that certain business combinations must be approved by holders of two-thirds of the shares held by unaffiliated shareholders, as well as by the holders of two-thirds of all shares as discussed above.3  When an action involving a viable bank is involved, satisfaction of this requirement as a predicate to Commissioner approval of the action is entirely consistent with the plain text of the statutes requiring shareholder approval as specified in the TBCA, and the additional requirement is not inconsistent with any provision of the Finance Code or its related rules.

However, when the bank is insolvent, or where insolvency is threatened, a different situation is presented.  In such cases, there is little or no shareholder value to protect, time is frequently of the essence and obtaining the shareholder approvals required by the TBCA, even if ultimately forthcoming, would only exacerbate an unsatisfactory situation.  For example, even though the TBCA requires the holders of two-thirds of the shares to approve a sale of all or substantially all assets, Finance Code §32.405 explicitly authorizes the Commissioner to approve such a sale without shareholder approval upon a finding that the interests of depositors and creditors are jeopardized and that the sale is in their best interest.  In this situation, a TBCA requirement for any type of shareholder approval is inconsistent with the Finance Code and is not applicable.4

The Bank is financially sound, and is not in conservatorship or receivership.  Consequently, if the proposed transaction is a business combination as defined in the TBCL, the transaction is subject to the TBCL.

B.  The proposed acquisition of 100 percent of the stock of the Bank by the Holding Company is a prohibited business combination under the TBCL.

The TBCL prohibits an "issuing public corporation" from engaging in a "business combination" with an "affiliated shareholder" (or an affiliate of an affiliated shareholder) for three years following the affiliated shareholder's share acquisition date unless (i) the business combination or the acquisition of shares is approved by the board of directors of the issuing public corporation before the acquisition date, or (ii) the business combination is approved by affirmative vote of at least two-thirds of the shares not owned by the affiliated shareholder at a meeting of the shareholders held not less than six months after the affiliated shareholder's share acquisition date. TBCA Art. 13.03.  An "issuing public corporation" is a domestic corporation that has (i) 100 or more shareholders; (ii) any voting shares registered under the Securities Exchange Act of 1934; or (iii) has shares qualified for trading in a national market system. TBCA Art. 13.02.A.(6).  We assume that the Bank, with *** [more than 100] shareholders, is an "issuing public corporation."

A "business combination" is defined, as pertinent to the subject transactions, as a "merger, share exchange, or conversion" of an issuing public corporation with (i) an affiliated shareholder, or (ii) a corporation that is, or after the transaction would be, an affiliate of the affiliated shareholder (i.e., controlled by the affiliated shareholder). TBCA Art. 13.02.A.(4).  An "affiliated shareholder," in pertinent detail, is a "person" that is the beneficial owner of 20 percent or more of the outstanding voting shares of the issuing public corporation. TBCA Art. 13.02.A.(3).  For purposes of this definition, "person" includes two or more persons acting as a partnership, limited partnership, syndicate, or other group under an agreement or understanding, whether or not in writing, to acquire, hold, vote, or dispose of shares of a corporation. TBCA Art. 13.02.A.(7).  A beneficial interest in shares is not acquired pursuant to a tender of shares until the shares are accepted for purchase or exchange. TBCA Art. 13.02.A.(3)(b)(i).  However, a person is a beneficial owner of shares if the person has the right to acquire the shares "whether the right may be exercised immediately, or only after the passage of time, pursuant to an agreement, arrangement, or understanding", TBCA Art. 13.02.A.(3)(i).

Under the facts and the foregoing definitions, the initial acquisition of voting shares by the Organizers, pursuant to voluntary transactions under the contract and tender offer, is not subject to the TBCL because the acquisition is not a result of a "merger, share exchange, or conversion."  However, the second transaction — the exchange of the Bank's shares with those of the Holding Company (subject to dissenter's rights) — is subject to the TBCL.  The Organizers become an "affiliated shareholder"on the date they acquire a beneficial ownership of 20 percent or more of the Bank's voting stock, no later than the date the tendered shares are accepted and purchased, if not earlier.5  The share exchange would be a "business combination" with an entity that is an affiliate of the affiliated shareholder, namely the Holding Company.  Consequently, this transaction could not take place until three years after the share acquisition date6 unless the board of directors approved the share exchange prior to that date, which we understand did not happen, or unless two-thirds of the remaining shares not beneficially owned by the Organizers affirmatively vote to approve the combination at a duly called meeting for that purpose no sooner than six months after the share acquisition date.

In the event that the original proposal could not be completed in compliance with the TBCL, you asked our opinion regarding two alternative proposals by the Organizers set forth in a "Confidential Exhibit C" attached to your inquiry.  In the first scenario, after completion of the tender offer the Organizers would exchange their shares for shares of the Holding Company and offer the remaining shareholders the opportunity to do likewise.  After this voluntary exchange, the Holding Company would attempt to acquire the remaining shares through a share exchange with the Bank, which, as the Organizers acknowledge, would require the affirmative vote of two-thirds of the remaining shares.  We see no impediment in the TBCL to the voluntary exchange of Bank shares for Holding Company shares by the Organizers or by an unaffiliated holder of Bank shares.7  The final step to compel exchange of the remaining Bank shares is subject to the TBCL, as the Organizers appear to concede.

The second alternative would involve the withdrawal of the tender offer and the formation of a Holding Company subsidiary to engage in a merger transaction directly with the Bank.  Because the subsidiary is controlled by Organizers through the Holding Company, the share exchange would be with an affiliate of the Organizers.  If the Organizers constitute an "affiliated shareholder" prior to the date of the proposed transaction, the transaction would be a prohibited business combination unless first approved by the holders of two-thirds of the shares other than those beneficially owned by the Organizers.  We do not express an opinion regarding whether the Organizers constitute an "affiliated shareholder" prior to the date of the proposed transaction.  Such a determination rests on two alternate factors.  If the Organizers constituted an affiliated shareholder at any time prior to the withdrawal of the tender offer, such as pursuant to beneficial ownership of the President's shares under contract, they will continue to be so classified under TBCA Art. 13.02.A.(2) as a result of having been an affiliated shareholder "within the preceding three-year period." If not, a determination must be made based on the manner in which the contract to acquire the President's shares is amended to address the new proposed transaction.

Opinion No. 99-24

If a safe deposit box is opened without the lessee being present, one bank employee must be present who is an officer and another bank employee must be present who is a notary public.

June 25, 1999

Loren E. Svor, Assistant General Counsel

By letter dated May 6, 1999, you requested our interpretation of the Texas statutory requirements for opening a safe deposit box when the lessee is not present.  Specifically, you asked whether the requirement of Tex. Fin. Code §59.109 that such an opening be done in the presence of two bank employees, "at least one of which is an officer. . . and at least one of which is a notary public" would be satisfied if two employees were present, but the officer present was also the notary public, i.e., the other employee present was neither an officer or a notary.  It is our opinion that Tex. Fin. Code §§59.107 and 59.109 require that when a safety deposit box is opened except in the presence of the lessee, its contents must be inventoried by one person acting in the capacity of an officer or manager of the safe deposit company, and another person acting in the capacity of a notary; the same person may not act in both capacities.

Analysis

There are two sections of the Finance Code (the "Code") that deal with the opening of safe deposit boxes when the lessee has not consented in writing and is not present.  Section 59.107(e) addresses a relocation which requires an opening of the box.  In pertinent part it reads:

If during the relocation the box is opened and the lessee does not personally supervise the relocation or has not authorized the relocation in writing, two employees, at least one of whom is an officer or manager of the safe deposit company and at least one of whom is a notary public, shall inventory the contents of the box in detail.  The safe deposit company shall notify each lessee of the new box number or location not later than the 30th day after the date of the relocation and shall include a signed and notarized copy of the inventory report.

Section 59.109(a) addresses the procedure to be followed if the box is opened because the rent is delinquent.  In pertinent part, it reads:

If the rent is not paid before the date specified in the notice, the safe deposit company may open the box in the presence of two employees, at least one of whom is an officer or manager of the safe deposit company and at least one of whom is a notary public.  The safe deposit company shall inventory the contents of the box in detail as provided by the comptroller's reporting instructions and place the contents of the box in a sealed envelope or container bearing the name of the lessee.

Although the procedures with respect to opening a box for which the rent is delinquent do not require that a signed and notarized inventory report be prepared, as does the procedure for opening a box for relocation, in light of the identically worded observer requirement, the two statutory provisions must be interpreted identically with respect to the capacities in which the employees are present.  As it pertains to your question, this means that the two employees must be present in capacities that would permit a signed and notarized inventory report to be prepared even though that action is not specifically required by section 59.109 of the Code.1

In essence, the issue is whether a notary public may function as a notary and simultaneously be involved in the transaction in another capacity.  The general rule is that a notary may function as such with respect to a transaction provided that the notary is not financially or beneficially interested in the transaction. Phillips v. Brazosport Savings and Loan Assoc., 366 S.W.2d 929, 931-932 (Tex. 1963).  A notary is not "interested" in a transaction merely by being an employee of a party executing a document. In re Bruno, 974 S.W.2d 401 (Tex. App.-San Antonio 1998); Creosoted Wood Block Paving Co. v. McKay, 211 S.W. 822 (Tex. Civ. App.-Dallas 1919).2  However, if a notary is acting as an agent for a party in the transaction, particularly if the notary actually signs the instrument as an agent for a party, interest is presumed. Kutch v. Holley, 14 S.W. 32 (Tex. 1890).

When a safe deposit box is inventoried, the bank officer is required to be present because the officer is an agent of the bank, legally empowered to bind the bank.  The officer signs the inventory report as the agent for the bank, and therefore may not also act as the official that notarizes the document. Id.  Additionally, in requiring that the notary actually be present at the opening of the box, the statute apparently contemplates that the notary will provide independent verification of the accuracy of the officer's statement, as well as administering the oath to the officer.  It seems improbable that the legislature intended that this elaborate procedure to assure the accuracy of an inventory of the safe deposit box could be essentially nullified by allowing the same person simultaneously to perform the functions of preparing the inventory, swearing to its accuracy, administering the oath, and providing independent verification of its accuracy. See Bridgestone/Firestone, Inc. v. Glyn-Jones, 878 S.W.2d 132, 134 (Tex. 1994) (Statutory provision will not be construed to cause a result the Legislature almost certainly could not have intended).  We thus construe the statute to preclude the same person acting both as an officer of the bank and the notary public.

Opinion No. 99-22

A trust company may employ a third party to provide ministerial or administrative services with respect to customer accounts, and the location of the servicer will not be considered a branch of the trust company, provided that the services do not include the exercise of fiduciary powers except as otherwise explicitly permitted by Texas law.

July 22, 1999

Loren E. Svor, Assistant General Counsel

By letter dated May 28, 1999, you described a proposed arrangement under which [***] Corporation (the "Service Corp.") would provide a variety of "back office" services related to custodial accounts maintained with [***] Trust Company (the "Company").  Service Corp. and the Company are affiliated through common ownership by the [****].  You have asked for our assurances that Service Corp. would not be deemed to be a branch of the Company by virtue of the proposed activities on behalf of the Company.  It is our opinion that the Company may contract with Service Corp. to provide the indicated ministerial or administrative services related to custodial accounts without the location of Service Corp. being considered a branch of the Company because these activities do not constitute engaging in the "trust business."

As outlined in your letter, the Company desires to expand its services to customers who are heavily invested in mutual funds.  This type of account is transaction intensive, and the existing volume of such business does not justify the level of in-house staffing necessary to maintain it.  The Company wishes to contract with Service Corp., an affiliate already servicing such accounts as part of its business, to provide the back office support necessary to administer its existing accounts of this type, and to allow expanded activity in this area without the necessity of hiring personnel in-house, at least until the volume of business would justify such a resource allocation.  The Company believes that the arrangement would be less costly than handling these functions in-house and that, in fact, it may not be possible to hire sufficient satisfactory personnel given the tight local labor market.  The Company further believes that the proposed cost is similar to or less than what would be charged by a unrelated third-party servicer.

Analysis

A state trust company is required to obtain the acquiescence or approval of the Banking Commissioner for any additional offices at which it engages in the "trust business." See Texas Trust Company Act ("TCA") (V.T.C.S. Art. 342a-1.001 et seq.) §§3.201 and 3.2031 [now Finance Code §§182.201 and 182.203]; see also 7 TAC §21.1(a)(2).  "Trust business" is defined as "the business of a company holding itself out to the public as a fiduciary for hire or compensation to hold or administer accounts." TCA §1.002(a)(50)2 [now Finance Code §§181.002(a)(49)].  The Texas Trust Code (Tex. Prop. Code, Subtitle B) provides that a trustee may engage third-parties to provide certain services with respect to fiduciary accounts in the course of performing fiduciary duties.  For example, a trustee may employ attorneys, accountants, agents and brokers as reasonably necessary to the administration of the trust estate. Tex. Prop. Code §113.008.  A state trust company that is serving as a trustee, or serving as a custodian of an IRA account, may employ an affiliate to provide "brokerage, investment, administrative, custodial, or other account services" with respect to a trust. Tex. Prop. Code §13.053(f); See Opinion No. 98-15 (July 27, 1998), citing Transamerican Leasing Co. v. Three Bears, Inc., 586 S.W.2d 472, 476 (Tex. 1979)(trustee may give authority to others to carry ministerial or administrative acts to effectuate discretionary decision).

•  Processing new accounts, withdrawals form the accounts, and customer investment directions (including account termination or transfer);

•  Preparation of account and financial statements for customers;

•  Reconciling accounts at the request of the Company or a customer, and otherwise responding to customer inquiries with respect to the accounts;

•  Originating ACH /direct electronic debiting and crediting with respect to the accounts;

•  Preparation of tax documents for the accounts;

•  Communication and coordination with mutual fund and annuity providers that have sold investment to customers;

•  The processing of checks from investment providers for credit to customer accounts;

•  Providing clerical staff, services, and filing services which may be requested by the Company or which are necessary to perform these duties; and

•  Other services of a similar nature.

Service Corp. may engage in activities authorized by law and in the scope of authority as an agent of a state trust company without being considered to be engaging in the trust business. TCA §3.022(1) [now Finance Code §182.021(1)].  It follows that the Company may designate Service Corp. as an agent to perform such activities without Service Corp.'s location becoming an additional office of the Company.  All of the activities described can be permissibly delegated pursuant to applicable law. See Tex. Prop. Code §113.008.3  Consequently, the proposed activities would not result in Service Corp.'s office being considered an additional office, or branch, of the Company.

Other matters.

Please note that 7 TAC §17.21 specifies the records that must be maintained by a state trust company, and further requires the prior approval of the Department if any of the records are maintained at a location other than the home office of the trust company.  The rule should be reviewed to determine that all such records with respect to the accounts to be administered by Service Corp. either will be available at the Company's home office, or that prior approval for a deviation is obtained.  We would also suggest that paragraph 2.02 of the proposed contract, which requires Service Corp. to provide only records adequate "to enable [the Company] to identify and monitor accounts and assets" be amended to require, in addition, any records required by rule, or by the Department for another reason.

A contract for the provision of incidental services such as described above should have, for safety and soundness and regulatory reasons, provisions covering indemnification, regulatory access to records, and immediate termination upon regulatory prohibition of the relationship.  The contract you have submitted satisfactorily addresses these areas.

This opinion is limited to the factual situation which you presented and to the issue of whether Service Corp. would be considered a branch of the Company under the proposed contract.  We presume that the Company has performed proper due diligence in the selection of the servicer and will provide the necessary oversight of the servicer's activities. Of course, any aspect of the relationship remains subject to criticism on safety and soundness grounds.

Opinion No. 99-19

A trust company may not earn interest on the "float" in a pooled disbursement account owned by the trust company and maintained at a bank, comprised of trust funds subject to outstanding checks.

July 16, 1999

Jeffrey L. Schrader, Assistant General Counsel

This is in response to your letter dated May 20, 1999 asking the department to reconsider a violation of law cited in the Report of Examination of [***] Trust Company (the "Company"), dated [***].  In that report the examiner cited management for recognizing income on the uncollected funds, or "float", in a pooled disbursement account comprised of trust funds subject to outstanding checks.  Pursuant to your request, the department has revisited this issue and concurs with the conclusion of the examiner that this practice violates Texas law.

The report indicates that since the last examination the Company entered into an agreement with a local bank to sweep disbursement account float balances in excess of $[***] into a mutual fund account.  The disbursement account float represents checks that have been issued but which have not cleared the bank.  The examiner noted that these funds arise out of the administration of trust accounts and clearly do not belong to the Company, and advised management that it is considered a conflict of interest for the Company to earn income on the float.  As a basis for this determination the examiner relied on Property Code §114.001(a), which provides that a trustee is accountable to a beneficiary for the trust property and for any profit made by the trustee through or arising out of the administration of the trust, even though the profit does not result from a breach of trust.

In response to this examination report you have provided reasons why you believe this practice is permissible.  First, you contend that administration of a trust ends, as it relates to a disbursement, when the disbursement check is issued to the payee and posted to the trust account.  Second, you advised the department that the Company uses a local bank for its trust disbursement account, and you believe that any earnings on disbursement float arise out of the normal administration of the Company's banking affairs, and not administration of the trust.  Finally, you believe that because banks with trust powers utilize disbursement accounts which contain check float until the disbursement checks are cleared, and receive an economic benefit from holding own-bank deposits, that it is permissible for a trust company to derive an economic benefit as well.

The department disagrees with your assertion that administration of a trust ends when the disbursement check is issued to the payee and posted to the trust account.  Upon termination of a trust, Property Code §112.052 provides that the trustee may continue to exercise the powers of the trustee for the reasonable period of time required to wind up the affairs of the trust and to make distribution of its assets to the appropriate beneficiaries.1  If a trustee's responsibilities and fiduciary duties continue upon termination of a trust through the winding up period, then they certainly continue until funds finally clear after the issuance of a disbursement check on an active trust.

The department also disagrees with your belief that earnings on disbursement float arise out of the normal administration of your Company's banking affairs, as distinguished from administration of the trust.  That view misses the point raised in the examination report — that the profits the Company realizes through this practice are generated through the use of others' funds (discussed in more detail below).

Finally, the department disagrees with the parity argument you advance. To the extent banks with trust powers derive some economic benefits when their trust departments place fiduciary funds in own-bank deposits, as you contend, those benefits are incidental to their deposit-taking powers.2   Property Code §113.057(b) provides that a corporate trustee may deposit with itself trust funds that are being held pending investment, distribution, or payment of debts, but requires the maintenance of a separate fund as security for such deposits (see also Tex. Rev. Civ. Stat. art. 342a-5.401).  Except for the limited circumstances in which a trust company is authorized to deposit trust funds with itself, discussed above, the acceptance of deposits requires depository powers, and your Company does not possess such powers.

In my opinion, the interest income generated through the sweep of float balances into a mutual fund account belongs to the trust beneficiaries.  A trustee's profit from dealing with property of a trust is property of the beneficiaries, not the trustee. Steves v. United Services Automobile Association, 459 S.W.2d 930 (Tex. Civ. App.-Beaumont 1970, writ ref'd n.r.e.).  The rule of law prohibiting a trustee from profiting from his own self-dealing with the corpus of the trust estate is set out in the case of Merriman v. Russell, 39 Tex. 278, 285 (1873), which states:

The rule that a trustee shall not deal with the subject of the trust for his own benefit, is said to be absolute and universal.  It is subject to no qualifications and no exceptions.

An abuse of trust can confer no rights on the party abusing it, or those who claim in privity with him.  It is a principle recognized at law in all cases, susceptible of being brought out as a ground of action or of defense in a suit of law, while its application in courts of equity is universally adopted.

The rule prohibiting a trustee from profiting from his own self-dealing with trust property is repeated in Slay v. Burnett Trust, 143 Tex. 621, 187 S.W.2d 377, 387 (1945), which provides:

It is a well-settled rule that a trustee can make no profit out of his trust.  The rule in such cases springs from his duty to protect the interests of the estate, and not to permit his personal interest to in any wise conflict with his duty in that respect.  The intention is to provide against any possible selfish interest exercising an influence which can interfere with the faithful discharge of the duty which is owning in a fiduciary capacity. Magruder v. Drury, 235 U.S. 106, 356 S. Ct. 77, 82, 59 L.Ed. 151, 156.

The rule extends to every variety of circumstances and has often been applied when a trustee has collected a commission or bonus or has otherwise made a profit for himself out of the property or funds of the trust or in the performance of his duties as a fiduciary.  A trustee who has made a profit for himself under such circumstances is required to account to his beneficiary for it; the profits so made belong to the trust. Slay, 187 S.W.2d at 388.

In addition to the prohibition on self-dealing by the trustee, the general rule that "interest follows principal" applies in Texas. Sellers v. Harris County, 483 S.W.2d 242 (Tex. 1972).  In Sellers, the Texas Supreme Court held that the interest earned by a deposit of money owned by the parties to a lawsuit is "an increment that accrues to that money and to its owners." 483 S.W.2d at 243.  The rule that "interest follows principal" has been established under English common law since at least the mid-1700's, and has become firmly embedded in the common law of the various States. Beckford v. Tobin, 1 Ves. Sen. 308, 310, 27 Eng. Rep. 1049, 1051 (Ch. 1749) ("Interest shall follow the principal, as the shadow the body").  A trustee is vested with legal title to, and the right of possession of, trust property, while equitable title is vested in the beneficiaries. Becknal v. Atwood, 518 S.W.2d 593 (Tex. Civ. App.-Amarillo 1975, no writ).  Accordingly, it follows that the income generated by that trust property belongs to the beneficiaries, as well.

The United States Supreme Court recently considered a similar issue in Phillips v. Washington Legal Foundation, 524 U.S. 156, 118 S. Ct. 1925 (1998).  The question in that case was whether a Texas requirement that the interest earned on client trust funds in IOLTA3  accounts was a property interest of the client or lawyer.  Under the IOLTA program, an attorney who received client trust funds was required to place them in a separate, interest-bearing account.  The Supreme Court held that the interest income generated by client funds held in Texas IOLTA accounts belonged to the client, as owner of the principal, relying on the "interest follows principal" rule enunciated in Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 101 S. Ct. 446 (1980).4  Because the interest income at issue is generated by trust property, those earnings belong to the trust beneficiaries under the "interest follows principal" rule.

In conclusion, the department confirms the violation of law cited in the examination report.  Management should discontinue the sweep arrangement because the Company cannot, consistent with its fiduciary duty, deal with trust property for its own benefit by appropriating interest earned on the "float" in a pooled disbursement account comprised of trust funds subject to outstanding checks because such profits are generated with trust property and therefore belong to the trust beneficiaries.

Opinion No. 99-18

Under Finance Code §34.304 and Property Code §113.057, a state bank may pledge its assets to secure trust funds on deposit with the bank and held pending investment, distribution, or payment of debts. However, Property Code §113.057 applies only to an express trust and does not authorize such a pledge based merely on the existence of a fiduciary duty imposed on the bank with respect to certain funds.

April 6, 1999

Jeffrey L. Schrader, Assistant General Counsel

Your letter dated March 9, 1999 regarding the examination of [XYZ] Bank, [Any City], Texas (the "Bank"), has been referred to me for a response.  The Bank was cited for a violation of Finance Code §34.304, which provides that a state bank may not create a lien on its assets or secure the repayment of a deposit except as authorized or required by that section, rules adopted under Finance Code, Title 3, Subtitle A, or other law.  The violation was cited due to the pledge of assets by the Bank to the deposits of a customer that originated through the Bank under an agency agreement.

You have argued that the deposits under the agency agreement are trust funds and that, therefore, the pledge is authorized by Property Code §113.057, which allows a corporate trustee to deposit with itself trust funds that are being held pending investment, distribution, or payment of debts if it maintains under control of its trust department as security for the deposit a separate fund of securities legal for trust investment.  However, Property Code §111.003 provides that, for purposes of the Texas Trust Code (Property Code, Title 9, Subtitle B), a "trust" is an express trust only.  The law on which you have relied as authority for the Bank to secure the deposits under the agency agreement, Property Code §113.057, is therefore only applicable to express trusts.  But the agency agreement in question is not an express trust under Texas law.  Therefore, the Bank is not authorized to pledge its assets to secure the deposits of its customer originated under the agency agreement, and is in violation of Finance Code §34.304.

An "express trust" is defined at Property Code §111.004(4) as a fiduciary relationship with respect to property which arises as a manifestation by the settlor of an intention to create the relationship and which subjects the person holding title to the property to equitable duties to deal with the property for the benefit of another person (emphasis added).  In addition the courts have held that in order to show an express trust the controlling tests are that (1) the words of the settlor ought to be construed as imperative and thus imposing an obligation on the trustee, (2) the subject to which the obligation relates must be certain, and (3) the person intended to be the beneficiary must be certain.1  An express devise of property to another as trustee for named beneficiaries is required for the creation of an express trust.2  I have reviewed the agency agreement and it does not manifest an intention to create a trust or fiduciary relationship.  Nor does it vest legal title of the deposit funds with the Bank.  Rather, the agency agreement merely functions as a cash management tool for excess funds held in a deposit account.

In addition, your reliance on OCC Interpretive Letter No. 699 (1996) as authority for the Bank to secure the deposits under the agency agreement is misplaced.  As you point out, the OCC states in that interpretive letter that the contractual relationship between a paying agent and the corporate customer, and other facts and circumstances, determine whether corporate trust or paying agent balances are held in a "fiduciary" capacity.  However, the fundamental issue in that interpretive letter was whether a national bank may deposit fiduciary funds in an affiliate bank and pledge or have the affiliate bank pledge assets to secure those deposits.  The OCC concluded that the national bank or affiliate bank may pledge assets to secure those deposits to the same extent as other competing institutions are permitted or required to do so under state law.  As described above, a state bank may not create a lien on its assets or secure the repayment of a deposit under Finance Code §34.304.

Opinion No. 99-17

An accounting increase dictated by GAAP in the carrying value of bank's investment in a leveraged lease cannot create a legal lending limit violation, provided the increase does not represent an additional investment by the bank or an additional contractual obligation by the bank to advance funds.

July 20, 1999

Sammie K. Glasco, Assistant General Counsel

This letter is in response to your letter of May 6, 1999.  You supplemented your letter by submitting documents related to the transaction on June 22, 1999.  In your letter, you asked whether an accounting increase in the carrying value of a bank's investment in a lease constitutes a legal lending limit violation when (a) the amount expended at the inception of the transaction was within the bank's legal lending limit, and (b) the increase in carrying value is required by generally accepted accounting principles ("GAAP").  We are of the opinion that adjustments in the carrying value of an investment in a leveraged lease dictated by GAAP cannot create a legal lending limit violation, provided the increase does not represent an additional investment by the Bank or an additional contractual obligation by the Bank to advance funds.

The transaction is as follows.  On December 16, 1997, [***] State Bank ("Bank") entered into a leveraged lease transaction through an assignment and assumption agreement ( the "Agreement") in which the Bank gained a beneficial interest in a Boeing 737-522 aircraft.  While in some leveraged leasing transactions the bank involved acts only as an owner-trustee for a beneficiary, it appears from the Agreement that the Bank, in this instance, is considered a "true" lessor.  The total contract price was $6,159,161.  The total amount expended at the inception of the transaction was $6,917,862.  The Bank's legal lending limit was $7,500,000 at the time and remains so today.  The Bank believes that compliance with certain technical requirements of GAAP may on occasion require a book entry increase in the carrying value of the investment to an amount in excess of $7,500,000.

Accounting for leveraged leases is highly complex, and is generally governed by Financial Accounting Standards Board Statement No. 13 ("FAS-13"), although numerous subsequent pronouncements have been issued that explain, interpret, or amend FAS-13 in a variety of ways.  According to the 1999 Miller GAAP Guide,1 GAAP for leases include the largest number of authoritative accounting pronouncements of any single subject in accounting literature.

As we understand the accounting treatment of leveraged leases, changes in the carrying value of the lease investment can occur as a result of the manner in which the related debt is amortized, exclusive of deferred tax liabilities.  By definition, a "leveraged lease" is characterized by several attributes, one of which is that once the lessor's net investment is completed, the carrying value of the investment generally declines in the early years and raises in the later years before being liquidated.2

Section 34.201, Texas Finance Code, provides that unless the banking commissioner approves otherwise "total loans and extensions of credit by a state bank to a person outstanding at one time may not exceed an amount equal to 25 percent of the bank's capital and certified surplus."3  Lease financing transactions are considered loans and extensions pursuant to 7 TAC §12.7.  More generally, according to 7 TAC §12.3(a)(2), a loan or an extension of credit includes any "contractual obligation to advance funds to or on behalf of a person." The amount chargeable to a bank's legal lending limit is established on the date the bank advances or is obligated to advance funds on a person's behalf.  In this instance, the extension of credit is $6,917,862, which is below the Bank's legal lending limit.  An increase in the carrying amount of this investment for accounting purposes does not increase the amount that the Bank has advanced or is obligated by contract to advance.  The Department only considers the amount that is "at risk" by the Bank for legal lending purposes.  The fact that the accounting treatment of a leveraged lease may require a book entry that increases the carrying value in the investment does not alter this conclusion.

This opinion is limited to the facts and circumstances stated in your letter of May 6, 1999, and the supplemental documents provided on June 22, 1999.  Any change in those facts or circumstances could result in a difference conclusion.

Opinion No. 99-16

A loan to a limited partnership is generally not attributable to limited partners, but may be attributed to limited partners that guarantee the loan to the extent of the guaranty and aggregated with direct loans of the guarantor for legal lending limit purposes.

August 3, 1999

Sharon Gillespie, Assistant General Counsel

By letter dated May 6, 1999, you have requested an opinion relating to the legal lending limits of your bank.  At my request, additional information has been faxed to me, and I have had several telephone conversations with you and other bank personnel (collectively referred to as "you" in this opinion).  According to this correspondence, you are inquiring as to the applicability of legal lending limits to a loan made to a limited partnership (a property development company) that would be jointly and severally guaranteed by three individuals who are limited partners.1  In the alternative, you ask what the legal lending implications would be if these individuals each limit their separate guarantees of the proposed loan to one-third of the amount of that loan.  You have represented that the bank will not be relying solely on the creditworthiness of the limited partnership for repayment of the proposed loan; instead, it will require the guarantees.

Currently, the limited partners jointly and severally guarantee outstanding loans from your bank to the limited partnership, and each singly guarantees loans to one of three different homebuilding companies that own in equal parts the limited liability company that is the general partner.  In our telephone conversations, you have indicated that the proposed loan is intended to purchase land in a growth corridor for a second phase of subdivision development; you have further indicated that there will be considerable cash equity in this project, that the loan to cost ratio is 71.1%, and that the loan will pay off on sale of 47 of the 72 lots.  Two of the homebuilding companies intend to build on some lots in the proposed subdivision; but together they will purchase no more than 35% of the lots in the development.  Most of the lots will be sold to other builders. You have indicated that you have had a long banking relationship with the homebuilding companies, each of which has always performed as agreed and has good credit.  You have also told me that, although you require guaranties in the normal course of business on all interim construction loans to homebuilding companies, the bank is not relying primarily on the creditworthiness of the guarantors to repay the loans to these companies; the bank is relying primarily on the financial strength of the companies and the collateral on their loans.  Prior loans from the bank to the limited partnership used to fund phase one of this development have not exceeded legal lending limits when aggregated with other outstanding debt described in your inquiry.

Based on the facts you have provided, you ask whether you must attribute 100% of the proposed loan to each of the individuals who will serve as its guarantors.  Although you have indicated there will be considerable cash equity in the development project, you have also indicated that you would not make the proposed loan to the limited partnership but for the guarantees; furthermore, you are confident through your knowledge of the guarantors that taking a one-third guarantee from each will protect the bank's interest in the loan's repayment.

Preliminary Issues

Before answering your questions, we observe that the relationships among the parties are numerous and complex.  At the core, three individuals control all related business, but in capacities that permit identification of separate borrowers.  Based solely on your representations, it would appear that the relationships of the limited partners as guarantors of the proposed loan to the partnership and as owners/guarantors of the homebuilding companies; and the homebuilding companies as owners/members of the limited liability general partner, as customers of the limited partnership, and as borrowers from the Bank, do not require attribution and aggregation of loans for legal lending limit purposes.  However, we have not investigated these relationships for the purpose of expressing an opinion.

Further, the proposed loan will be fully attributable to the general partner. See Opinion No. 99-08 (April 27, 1999).  You have not asked for our opinion, and we have not elaborated, whether a loan to a limited liability company must be attributed to the members.  However, if the members have limited liability similar to a limited partner or shareholder, attribution would not be made.

Subject to these observations, we limit our opinion solely to the guaranty issue you have raised.

Opinion Regarding Guaranties

Under 7 TAC §12.9(f)(1), loans to a limited partnership are not attributable to limited partners who are not generally liable for debts of the limited partnership.  However, if the individuals who are limited partners each agree to guarantee the full amount of the loan to the limited partnership, the proposed loan to the limited partnership is fully attributable to each guarantor under 7 TAC §12.9(g) for legal lending limit purposes, regardless of the guarantors' status as limited partners.  Section 12.9(g) provides that a loan which is guaranteed by a guarantor is not aggregated with direct loans to the guarantor "if the lending bank is relying primarily on the creditworthiness of the primary obligor and none of the tests set forth in this section are satisfied." Because the bank is not relying primarily on the creditworthiness of the limited partnership, the guaranteed loans to the limited partnership are attributed to each guarantor to the extent of the guaranty and will be aggregated with direct loans of such guarantors under this same analysis.  However, if each of the guarantors contractually limits his separate guarantee of the proposed loan to one-third the amount of that loan, only the amount actually guaranteed, i.e., one-third of the loan amount, would be attributed to each guarantor.

Our conclusions herein should not be construed as an endorsement of the advisability or quality of the proposed loan, a determination that must be made by the board of directors of the bank.  The bank is cautioned that the purpose of the lending limit is to reduce risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of the state bank's funds.  As a result, these types of loans will be closely scrutinized by an examiner.

This opinion is limited to the facts and circumstances stated in your written correspondence with the Department and any facts or assumptions set out herein.  Any change in those facts, circumstances, assumptions, or parties to the transaction may result in a different opinion.

Opinion No. 99-15

Loans secured by real estate occupied by individual parishes but owned by the area Catholic Diocese must be aggregated to the Diocese even though loans are nonrecourse.

June 9, 1999

D'Ann Johnson, Assistant General Counsel

By letter dated May 5, 1999, you requested our opinion whether loans secured by real estate occupied by individual parishes but owned by the Catholic Diocese would be aggregated even though there is a non-liability agreement to seek recourse solely against the real estate.  You have stated that the bank has obtained financial information from each of the parishes substantiating their ability to service the debt.  We are of the opinion that the loans would be aggregated.

Total loans or extensions of credit to any person or legal entity are limited to 25% of the Bank's capital and certified surplus. Tex. Fin. Code §34.201(a).1  The definition of loans includes non-recourse or limited recourse loans or extensions of credit. 7 TAC §12.3(a)(8).  After discussion with experts in canonical law, it is apparent that individual parishes have no separate legal existence from the Catholic Diocese.  The Diocese is more than a guarantor, because it signs the loan as borrower and holds title to the real property and all assets used or accumulated by the individual parish.  Consequently, the Diocese is the direct beneficiary of the loans and aggregation is required.  The Bank's limitation on repayment or recourse does not exempt the Bank from legal lending limit requirements.

Opinion No. 99-12

A foreign corporate fiduciary may serve as a fiduciary in Texas under certain conditions

May 12, 1999

Everette D. Jobe, General Counsel

By Internet e-mail dated April 9, 1999, you requested a letter from this Department indicating the terms and conditions required for a foreign corporate fiduciary to serve as a fiduciary in Texas.  Specifically, you mentioned possible application and fee requirements and any requirement to post a bond or pledge securities.  This area of the law is currently in flux due to pending legislation, but I can describe current law and what the law will be if House Bill No. 2066 passes the 76th Texas Legislature and is signed into law, as appears likely.1

Current Law: §105A, Texas Probate Code

Under current law, a foreign corporate fiduciary may serve in Texas under the authority of §105A, Texas Probate Code.  That section generally permits a foreign corporate fiduciary to be appointed to serve as trustee in this state in any fiduciary capacity, but only to the same extent as the home state of the foreign corporate fiduciary grants authority to serve in like fiduciary capacity to a Texas corporate fiduciary.  However, a foreign corporate fiduciary may not establish a place of business in Texas, including a branch or agency office, or directly or indirectly solicit fiduciary business in this state.2

Before accepting an appointment as a fiduciary in Texas, §105A requires a foreign corporate fiduciary to file with the Texas Secretary of State (1) a copy of its current charter or articles of incorporation or association, as amended, certified by its corporate secretary under corporate seal; (2) a written, perpetual, and irrevocable appointment of the Secretary of State as agent for service of process with respect to any action or proceeding relating to a trust, estate, fund, or other matter arising in this state and in which the foreign corporate fiduciary is acting as a fiduciary; and (3) a written designation, subject to change by a new designation, specifying the name and address of the officer, agent or other person to whom notice or process is to be forwarded by the Secretary of State.  No fee is charged for this filing.  Service on the Secretary of State as agent for a foreign corporate fiduciary is conclusively presumed to equate to personal service within this state upon the foreign corporate fiduciary.  Pursuant to §405.031(a)(4), Texas Government Code, the Secretary of State charges a fee for forwarding service of process of $40  per person or party served through the Secretary of State.

A foreign corporate fiduciary acting in a fiduciary capacity in this state in strict accordance with the §105A is not considered to be "doing business" in this state within the meaning of Article 8.01, Texas Business Corporation Act, and therefore is not required to file an application for a certificate of authority to do business in Texas as a foreign corporation.

Violation of §105A is a misdemeanor offense, and a conviction can result in the foreign corporate fiduciary being prohibited from serving in this state in any fiduciary capacity in the future.

Texas does not impose any general corporate requirement on a foreign corporate fiduciary to post a bond or pledge securities.  With regard to specific appointments, Texas law does not require a bond of a corporate fiduciary.  Section 195(b), Texas Probate Code, provides that a "corporate fiduciary" is specifically exempted from bonding requirements otherwise applicable to the personal representative of a decedent's estate.  The term "corporate fiduciary" is defined in §3(d), Texas Probate Code, as a trust company or bank having trust powers, whether domestic or foreign.3  Section 113.058(a), Texas Property Code, provides that "[a] corporate trustee is not required to provide a bond to secure performance of its duties as trustee."  The term is  not defined in the Property Code and so must be taken in its ordinary meaning as a fiduciary that has a corporate form of organization.  Because the term as used in the Property Code is not modified by terms indicating a locus of incorporation, my conclusion is that the term includes both domestic and foreign corporate fiduciaries.

Proposed Law: §105A, Texas Probate Code, as amended by House Bill No. 2066

Currently pending in the 76th Texas Legislature is House Bill No. 2066, relating among other matters to the authorization of interstate operations of financial institutions in accordance with the requirements of federal law.  Section 6.002 of the bill would amend §105A, Texas Probate Code, to remove some of its current restrictions. If the bill becomes law, it will be effective on September 1, 1999.  At this writing, passage appears likely.  In addition, §3.001 of the bill will enact new statutes that will specifically authorize a foreign corporate fiduciary to open a trust office or a representative office in this state.

As proposed to be amended, §105A will limit the concept of a "foreign corporate fiduciary" to a foreign financial institution that does not have its main office or a branch office in this state.  Thus, a financial institution that operates an interstate branch or trust office in Texas will not be subject to §105A and be treated as a domestic entity for purposes of laws governing corporate fiduciaries and will be entitled to solicit and accept fiduciary business in this state without limitation.

As proposed to be amended, §105A will continue to permit a "foreign corporate fiduciary" (as that term is re-defined) to serve as trustee in this state to the same extent as the home state of the foreign corporate fiduciary grants authority to serve in like fiduciary capacity to a Texas corporate fiduciary.  The filing requirements with the Texas Secretary of State, fees for filing, the effect of such filing, and bonding requirements are not affected by the amendment.  Violation of §105A will continue to be a misdemeanor offense, and a conviction can result in the foreign corporate fiduciary being prohibited from serving in this state in any fiduciary capacity in the future.

Opinion No. 99-11

May 13, 1999

D'Ann Johnson, Assistant General Counsel

A state bank may process applications for internet provider services and process payments as an agent for the holding company of the bank.  Further, a state bank may, incidental to providing or planning to provide internet banking services, serve as a full internet access provider to both customers and non-customers as a necessary ancillary activity required to engage in internet banking.

By letter dated March 19, 1999, you have inquired whether a state bank may process applications for internet provider services and process payments as an agent for the holding company of the bank.  We are of the opinion that this activity is permissible for state banks.

Background

According to your letter and conversations that I have had with you, the bank is owned by a one-bank holding company.  The holding company, subject to the approval of the Federal Reserve, intends to engage in the sale of internet provider services to customers in the bank's service area.  Such a service supplies an electronic gateway by which a customer connects a computer to the internet using a modem and a telephone line.  The holding company will employ a person to install and service internet customers.  This person will also receive a commission for any sales.  The bank would house the equipment under a lease with the holding company.  The equipment will consist of a computer, modem, and telephone lines.   This computer system will be completely separate from the bank's computer system.  There will be no links between the two systems.

The bank desires to enter into an agreement with the holding company to process applications for internet provider services and process payments as an agent for the holding company.  New account representatives of the bank will offer information and applications for the internet services to both customers and non-customers of the bank.  The bank will not receive a commission or fee for performing these functions as an agent of the holding company.

As part of its Business Plan, the bank has decided to offer home banking products to its customers.  The bank will also utilize the internet services offered by the holding company in order to offer these products.  The bank, under agreement, will pay a fee to the holding company for internet access.  Because of the initial start-up costs of home banking alternatives, the strategy of the bank is to assist  the holding company as a processing and collection agent in order to develop a base of customers with internet access.  When the customer base will support the investment in home-banking software, the bank intends to offer internet banking alternatives to its customers.

Discussion

The Finance Code prohibits a state bank from investing funds in trade or commerce by selling or otherwise dealing in goods or owning or operating a business not part of the business of banking. Tex. Fin. Code §34.107.  However, a state bank may engage in any activity, directly or through a subsidiary authorized by the Texas Finance Code or determined by the Banking Commissioner to be closely related to banking, Tex. Fin. Code §32.001(b)(4) [now in substance Finance Code §32.001(b)(6), pertaining to activities financial in nature, and (b)(7)].  Additionally, a state bank may exercise incidental powers necessary to carry on the business of banking, Tex. Fin. Code §32.001(b)(1).  Under Tex. Fin. Code §32.001(b)(2), a state bank may act as agent and, in that capacity, receive and disburse money.1

Banking is defined as "the performance of the exclusive depository institution functions of accepting deposits and discounting loans and the performance of related activities that are not exclusive to banks or other depository institutions, including paying drafts or checks, lending money, and providing related financial services authorized by this subtitle." Tex. Fin. Code §31.002(a)(4). This list is not exhaustive.  Other powers of a state bank are outlined in Tex. Fin. Code §32.001(b).  See also, 7 TAC §11.83.  Activities that are not included in the lists of enumerated powers are also part of the business of banking.  In addition to these enumerated powers,  state banks may engage in any activity that is permissible for a national bank.  Tex. Fin. Code §32.009; 7 TAC §11.81. [Now also see Finance Code §§32.010 and 32.011.]

Internet banking is part of the business of banking.  Providing banking services via phone lines or by the internet simply utilizes advancing technology to provide traditional banking services.  This alternative means of serving customers responds to customer needs.  Customers may bank day or night, and are not required to bank only during business hours.  Providing home banking services also benefits the bank because it allows the bank to utilize less costly distribution channels.

In addition, it is part of the business of banking to collect and remit monies.  Such activity also serves as a public convenience.  See, Opinion No. 97-06 (a state bank may sell prepaid phone cards as an agent).  Moreover, a state bank, pursuant to request, may act as a "finder" in bringing together a buyer and seller where the bank provides the information and does not engage in negotiation.  7 TAC §11.83(d).  In acting as a finder, the bank may advertise the availability of, and accept a fee for such services.  See also, Opinion Nos. 98-25 and 95-31 (advertising activities are the business of banking); and 12 CFR §7.1002 (a national bank may act as a finder and may advertise and accept a fee).  According to the information you provided, the bank will offer information about the internet provider services to its customers and noncustomers and collect payments on behalf of the holding company.  Therefore, in response to your direct question, it is part of the business of banking for the bank to act as agent for the holding company to offer internet provider services and collect payments from customers.  In addition, it is part of the business of banking for the bank to act as a finder on behalf of the holding company to sell internet provider services.

The question whether the bank could engage in this activity directly has not previously been determined by this Department.  We note that we have not articulated a test to determine which  incidental powers are necessary to carry on the business of banking.  "Necessary", for purposes of federal law, has been construed to mean "convenient or useful" and national banks are authorized to engage in any activity that is incidental to enumerated powers or incidental to the business of banking. NationsBank of North Carolina, N.A. v. Variable  Life Annuity Co., 115 S.Ct. 810 (1995).

The questions posed regarding permissible activities are often very fact specific.  However, in addition to statutory authority, several rules identify some activities that are permissible for state banks.  See, 7 TAC §3.1 (a state bank may act as a broker for private placement of securities); §3.2 (a state bank may provide investment and financial management services and act as a dealer-manager in connection with tender offers).   The Federal Reserve Board has likewise, by rule, determined a number of nonbanking activities that are so closely related to banking as to be a proper incident thereto.  The list includes collection agency services, asset management, servicing, and collection activities, and data processing as long as the data to be processed are financial, banking, or economic.  12 CFR §225.28.  The Office of the Comptroller of the Currency has rules that further elaborate the powers of national banks.  See, 12 CFR part 7, subchapter A.  Under these rules, "[a] national bank may perform, provide, or deliver through any electronic means and facilities any activity, function, product, or service that it is otherwise authorized to perform, provide or deliver.  A national bank may also, in order to optimize the use of the bank's resources, market and sell to third parties electronic capabilities acquired or developed in good faith for banking purposes."  12 CFR §7.1019.

Several legal opinions issued by this Department have discussed activities that are incidental to the business of banking.  One opinion permitted a state bank that in good faith acquired excess capacity in the bank's internet connection to sell the excess capacity to its business customers.  Opinion No. 95-72.  In another opinion, we found that a bank may provide links from its web page to web pages of bank customers and provide website hosting services to bank customers because such activity is incidental to the business of banking.  Opinion No. 98-18.2

In this case, offering internet provider services facilitates the bank's business plan to provide home banking services to its customers.  While the bank does not yet offer electronic banking alternatives, the bank may develop the infrastructure and conditions to facilitate  a successful electronic banking program.  Providing full internet access creates a package of related services that permits the bank to offer internet banking alternatives to its customers and enables the bank to successfully market such alternatives.  While the technology is more recent, offering internet access may one day be viewed as permissible as the bank's sale of checkbooks to its customers for the purpose of withdrawing and transferring funds from a checking account.  The activity will benefit the bank by bringing customers closer to the bank and could attract new customers.  It will better position the bank to reduce costs and encourage customers to utilize internet banking alternatives.  The bank, through its participation in offering these services, will likely build relationships with its customers and obtain opportunities for cross-selling of bank products.

Providing internet service access does not limit customers  to solely financial, banking or economic uses.  However, full internet service access is necessary so that a customer may engage in internet banking.  And there is no additional expense to offer a full range of service.  The fact that a customer could utilize another internet service provider does not exclude a bank from offering a service that is incidental to the business of banking.  A state bank may own the means of distribution to provide banking services to their customers.  Therefore, a state bank may, incidental to the business of banking, provide full internet access because it is a necessary ancillary activity required to engage in internet banking.

Internet access may be offered to non-customers.  Excess capacity in internet access acquired in good faith to provide internet banking alternatives to bank customers may be offered to non-bank customers.  In this case, it adds nothing to the cost of providing internet access to customers.  And, it is impractical to separate customers from non-customers, for one could fall into either category by opening or closing an account.  The basic equipment necessary to establish internet service would have capacity far in excess of that required to provide banking services over the internet.  A state bank need not allow excess capacity to go to waste.  Moreover, the bank to customers may offer its non-banking services in order to expand its goodwill in the community with the hope of attracting new customers.

Finally, the risks in providing internet access are similar to providing banking services electronically.  The bank has experience protecting existing data processing systems from unauthorized access.  The bank represents that the computer system of the bank and its financial data will be completely separate from the system housing the server.  The bank and the server system will maintain separate phone lines and data bases.

Therefore, we find this activity to be incidental to the business of banking, specifically internet banking.  Consequently, because the bank is pursuing a business plan that will ultimately result in the offer of internet banking alternatives, this activity does not violate Tex. Fin. Code §34.107 and is an activity that the bank may enter into directly.

Internet access service may be utilized for nonfinancial purposes.  Therefore, the bank must ensure that any investment by the holding company complies with federal restrictions.

Safety and soundness must be considered.  The bank should avoid any indication that it endorses  this service.  The bank must ensure that customers are informed that the service is offered by the holding company and not the bank.  In addition, the bank should obtain an agreement from the holding company to hold the bank harmless for any problems that may arise from the internet services.  And the holding company should require all customers to sign a user agreement that limits liability to the cost of service.

The bank also should maintain complete files of the activity for examination purposes.  We also recommend notifying the bank's  bonding company of the new activity being conducted by the bank.

This opinion is limited to the facts and circumstances described above.  Any changes in the facts  and circumstances could result in a different opinion.

Opinion No. 99-08

Loans to limited partnerships with the same general partner will be aggregated to the general partner for legal lending limit purposes, even if the loans are made without recourse to the general partner.

April 27, 1999

Loren E. Svor, Assistant General Counsel

By letter dated March 3, 1999, you requested our opinion on whether a proposed $*** loan to [Limited Partnership A], would result in *** Bank exceeding its legal lending limit, either directly or under the aggregation or attribution principles set forth in the pertinent rules.  Your concern is prompted by the fact that the partners involved in [Limited Partnership A], both general and limited, are also involved in various capacities in numerous loans that the Bank has extended to other limited partnerships, with current outstanding balances of $***.  It is our opinion that the proposed loan would result in a violation of the Bank's legal lending limit, which you state is $***, because [General Partner, a limited liability company], the general partner in [Limited Partnership A], is also the general partner in other limited partnerships with existing loan balances with the Bank amounting to $***, with a resulting attribution of balances, present and prospective, to the General Partner of $***.

For purposes of our analysis, the complex financial interrelationships among and between the individuals and legal entities involved in the loans in question can be summarized as follows:

•  The principal investors in the various legal entities involved in all of the loans relevant to your question are six individuals: [Persons A & B], [Person C], [Person D], [Person E], and [Person F] (the "Principals").

•  The individual loans involved are to different limited partnerships for the purpose of holding and operating various commercial retail properties in [the city].  The loans are limited to 67% or less of the appraised value of the related property, and have debt service ratios of 1.4 or better.  The largest of these loans is the proposed loan to [Limited Partnership A] in the amount of $***, which would be the only loan to this partnership.

•  The general partner in [Limited Partnership A] is [General Partner], which is owned by the Principals.

•  [General Partner] is also the general partner in [Limited Partnership B], with a present loan balance of $***, and [Limited Partnership C], with a present loan balance of $***.  The total of present loans to limited partnerships in which [General Partner] is the general partner is $***; after the proposed loan the total would be $***.

•  None of the limited partnerships are financially interrelated in the sense that none make payments to or receive income from another.

•  The Bank has obtained guaranties from the Principals in amounts limited to 150% of their direct or beneficial interests in the various projects.  The Bank represents that it is not relying on the guaranties for repayment, but obtains them as incidental security and to assure the involvement of the Principals in the projects.  The largest total amount of these guaranties is from [Person F] in the present amount of $*** ($*** if the proposed loan is made).  In all cases, the Bank represents that the primary source of repayment is expected to be the cash flows from the properties, and the secondary source, should one be needed, is the properties themselves.

Total loans or extensions of credit outstanding to a person (any legal entity) are limited to 25 percent of the Bank's capital and certified surplus (the "legal lending limit.").1 Tex. Fin. Code §34.201. You state that the Bank's legal lending limit is $***.  None of the loans or a combination of loans, existing or proposed, to a single limited partnership exceed this amount.  However, rules adopted by the Department set forth certain circumstances in which individual loans will be "attributed" such that they will be deemed to be loans to a person or entity in addition to the nominal borrower, or contingent liabilities will be "aggregated" with direct obligations for purposes of determining the Bank's compliance with its legal lending limit. These rules provide, in general, that a loan will be considered to have been made to a person in addition to the nominal borrower if: (1) the proceeds of the loan or assets purchased with the proceeds are transferred to the other person other than in an arm's-length purchase transaction ("direct benefit"); (2) the loans are to affiliated borrowers, defined as a borrower that directly or indirectly controls, is controlled by, or is under common control with another borrower, and 50% or more of one borrower's gross receipts or expenditures are derived from another borrower (25% unless rebutted) ("common enterprise"); and, (3) the primary source of repayment is the same for several borrowers ("source of repayment"). Under the facts which you have set forth, direct benefit attribution would not apply because the proceeds of each loan go to each individual partnership and the property is held in the name of the partnership. The loans would not be attributed under the source of repayment test, because the expected source of repayment is the individual and discrete property securing each loan. And a "common enterprise" does not exist because, while several of the borrowers may be affiliated in that they are controlled by [General Partner], they are not financially interdependent to any extent, much less to the degree required by the rule. See 7 TAC §12.9.

Similarly, under the facts which you have presented the contingent liabilities of the guarantors would not require aggregation with other obligations of the guarantors. You do not indicate that the guarantors have individual direct loans with the Bank, and none of the guarantees, present or prospective exceed the Bank's lending limit. If this should change, the obligations would nonetheless not be aggregated provided that the Bank is relying on the financial condition and responsibility of the primary obligor rather than the guarantor for repayment of the loan, and that this fact is evidenced by the certification of a Bank officer. See 7 TAC §12.9(g).

However, a special rule applies to loans to a partnership. 7 TAC §12.9(f) provides:

A loan or extension of credit to a partnership, joint venture, or association is considered to be a loan or extension of credit to each member of the partnership, joint venture, or association other than those partners or members that, by the terms of the partnership or membership agreement, are not held generally liable for the debts or actions of the partnership, joint venture, or association, provided those provisions are valid against third parties under applicable law, and that have not otherwise agreed to guarantee or be personally liable on the loan or extension of credit.

A loan to a limited partnership would not be considered a loan to the limited partners because the Texas Revised Limited Partnership Act provides that  limited partners are not generally liable for the debts and actions of the partnership, and this limitation on general liability is valid against third parties.  See V.T.C.S. art. 6132a-1, §3.03.  But a general partner is jointly and severally liable for all debts and obligations of the partnership (except as may have been agreed otherwise with an individual claimant).  V.T.C.S. art. 6132a-1, §4.03; art. 6132b-3.04.  Consequently, the existing loans to [Limited Partnership B] and [Limited Partnership C], totaling $***, and the proposed loan to [Limited Partnership A] in the amount of $***, are or would be considered loans to [General Partner] as well.  Because the $*** total of these loans exceeds the Bank's $*** legal lending limit by $***, the Bank cannot legally make the proposed loan.

In a telephone conversation subsequent to your letter, you asked whether this result could be avoided by simply making the loan non-recourse with respect to [General Partner], citing as support for this possibility our opinion 94-1 (Oct. 18, 1994).  Opinion 94-1 dealt with the question of whether a loan to a current borrower must be aggregated with a proposed participation in a loan to a limited partnership in which the current borrower was a general partner.  The loan agreement for the loan to the limited partnership provided that liability extended only to the partnership, not to the individual partners.  Relying on the wording of the rule then in effect, the opinion held that the loan to the limited partnership would not be attributed to the general partner.

The question would, I believe, be answered differently under the current rule.  Former 7 TAC §12.4 (repealed effective March 1, 1996) read as follows:

(1) Loans to partnerships, joint ventures, or associations.  Loans or extensions of credit to a partnership, joint venture, or association shall, for the purposes of these sections, be considered loans or extensions of credit to each member of such partnership, joint venture, or association, if under applicable law, each member of such partnership, joint venture, or association is liable for repayment of the loan or extension of credit to the entity involved.  (Emphasis added.)

This rule would not require attribution to the limited partners, because they would not have liability to the entity under statute.  The loan also would not be attributed to a general partner under the former rule because the loan terms provided that the general partner was not liable to the entity involved, i.e., the inquiring bank.  Under the present rule, however, which was quoted above, it is not sufficient that there be no liability only with respect to the bank, but also with respect to third parties, such as creditors or litigants.  A waiver of liability with respect to the lending bank does not affect general liability with respect to third parties.  Consequently, under the present rule, the participation in question would have been attributed to the general partner and aggregated with the bank's direct loan, and the participation could not legally have been entered into.  Similarly, under your hypothetical, loans to any limited partnership in which [General Partner] is the general partner must be attributed to [General Partner], and the loans to all such limited partnerships aggregated for legal lending limit purposes even if the loan or loans are without recourse to [General Partner].

This rule was changed as part of a general updating of the banking rules subsequent to the adoption of the Texas Banking Act by the 74th Legislature in 1995.  The change discussed above was the only substantive modification of the former rule, and was based on the otherwise similar legal lending limit rules promulgated the Office of the Comptroller of the Currency ("OCC") for the regulation of national banks.2  The policy reasons for the change were the same as those that prompted the OCC to make the same change several years earlier: (1) the former rule "encouraged banks to exclude borrowers from personal liability in situations where banking prudence . . . clearly counseled otherwise;" and (2) regardless of whether the general partner is directly obligated to repay the loan, the fact remains that the success of the limited partnership depends on the expertise and management skills of the general partner.  OCC Letter No. 134 [1981-1982 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,245, at 77,368 (Oct. 9, 1980); see also OCC No-Objection Letter No. 88-3, [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 84,043, at 76,656 (March 29, 1988).  The OCC has since 1971 interpreted their rule to require loans to a limited partnership to be attributed to the general partner even when the general partner is not personally liable on the loan; 7 TAC §12.9(f) requires the same result. Id. Consequently, Opinion No. 94-1 is overruled and is withdrawn.  Additionally, although not referenced by you, Opinion No. 97-03, on similar facts and reasoning, concludes that full aggregation can be avoided through a limited-recourse provision; consequently Opinion No. 97-03 is also overruled and is withdrawn.

Opinion No. 98-41

A charitable organization may serve as the executor of a decedent's estate if the charitable organization has a beneficial interest in the decedent's estate.

November 30, 1998

Jeffrey L. Schrader, Assistant General Counsel

This is in response to your telephone call which you followed up with a letter dated November 10, 1998.  You asked whether a charitable organization may serve as the executor of a decedent's estate under current Texas law.  The question you pose was the subject of an opinion issued by the Department in a letter dated December 3, 1993.  At that time the requestor was advised that Texas law prohibited a Texas nonprofit corporation from serving as a trustee or serving in any similar fiduciary capacity.  However, since the time that opinion was issued the Texas Legislature has enacted Acts 1997, 75th Leg., ch. 769, §1, which created the Texas Trust Company Act (Articles 342a-1.001 et seq., Revised Civil Statutes) [now Finance Code, §§181.001 et seq., codified by Act approved May 10, 1999 (S.B.1368), 76th Leg., §7.16, eff. Sept. 1, 1999] and amended portions of the Texas Non-Profit Corporation Act (Articles 1396-1.01 et seq., Revised Civil Statutes).  As a result of the law change a Texas nonprofit corporation now may serve as executor of a decedent's estate if the charitable organization has a beneficial interest in the decedent's estate.

The Texas Trust Company Act provides that a company does not engage in the trust business in a manner requiring a state charter by serving as trustee of a charitable trust as provided by Article 2.31, Texas Non-Profit Corporation Act.1  The Texas Non-Profit Corporation Act provides at Article 2.31 that a charitable corporation may serve as the trustee of a trust of which the corporation is a beneficiary.2  Therefore, a charitable organization that is described in §501(c)(3) or §170(c) of the Internal Revenue Code may serve as the executor of a decedent's estate provided the charitable organization has a beneficial interest in the decedent's estate.  The December 3, 1993, legal opinion issued by this Department has been superseded by the change in Texas law.

Legal requirements applicable to fiduciaries can be extremely complex.  Therefore, it is strongly recommended that any charitable organization considering serving as a fiduciary under Texas law obtain appropriate legal counsel with the necessary expertise in this highly specialized area before proceeding with such an undertaking.

Opinion No. 98-39

An out-of-state state bank, legally operating in this state, may branch at any location in the state, without regard to geographic limitation. Compliance with the public notice requirements of the Board of Governors of the Federal Reserve System satisfies the notice requirements of state law.

December 10, 1998

D'Ann Johnson, Assistant General Counsel

You have requested our opinion whether an Alabama state bank that has merged with a Texas bank can establish new branches in Texas.  We have concluded that an Alabama state bank, legally operating in this state, may branch at any location in the state, without regard to geographic limitation.  You have further inquired whether the public notice  requirements of the Federal Reserve satisfy the public notice requirements of Texas state law.  We have concluded that compliance with the public notice requirements of the Federal Reserve satisfies the requirements of state law.

Under 12 USC §1831u(d)(2), following an interstate merger, the resulting bank may establish, acquire, or operate additional branches at any location where any bank involved in the transaction could have established, acquired, or operated a branch under applicable federal or state law if such bank had not been a party to the merger transaction.  Texas law provides that a state bank may establish and maintain a branch office at any location on prior written approval of the banking commissioner.  Tex. Fin. Code §32.203.  An Alabama state bank, legally operating in Texas, may therefore, establish a branch at any location in the state to the same extent as a Texas state bank.

You have also requested an opinion whether the proposed branches comply with the branching laws of Texas. Regulations establish additional guidance relating to the establishment of a branch office.  See, 7 TAC §15.42.  The applicant must publish notice of the application in the community of the proposed branch.  The regulations provide for a particular form of the notice.  The applicant has published notice in the community of the proposed branch, in accordance with the notice requirements of the Federal Reserve.  Pursuant to 7 TAC §15.4(e), the Commissioner has determined that the notice requirements of the Federal Reserve satisfy the public notice requirements of Texas law.

Opinion No. 98-36

A trust company may not serve as the general partner of a limited partnership with clients as limited partners.

November 30, 1998

Jeffrey L. Schrader, Assistant General Counsel

Your letter of October 29, 1998 has been referred to me for a response.  You have asked whether ***, a state trust company ("Trust Company"), may serve as the general partner of ***, Ltd., a Texas limited partnership ("Partnership").

The question you pose was the subject of an opinion issued by the Department in a letter dated March 16, 1993.  At that time the Trust Company was advised that Texas law prohibited it from serving as general partner of the Partnership.  Because of subsequent changes in the law you have asked the Department to revisit the issue of the ability of a state trust company to serve as general partner of a limited partnership.

In your letter you describe briefly the background which led to the original opinion issued by the Department, and the events leading to your present request, as follows.  Trust Company created the Partnership several years ago as an investment partnership to manage the investments of the limited partners.  Partnership does not conduct any other business.  All of the limited partners are Trust Company clients.  Trust Company was initially the general partner of the Partnership.  However, in an examination conducted by the Department in 1992 the examiners cited Trust Company for violating former Article 342-503 of the Texas Banking Code, which prohibited a bank or trust company from investing funds in trade or commerce by buying and selling goods, wares or merchandise except when necessary to avoid loss.  The examiners asserted the position that, by serving as general partner, Trust Company violated that prohibition.  Trust Company appealed this finding. In the March 16, 1993 letter referred to above, the Department issued an opinion affirming the examiners' conclusion that Trust Company was not permitted to serve as general partner of the Partnership under Texas law.  In response to this determination, but without agreeing with the Department's position, Trust Company at that time elected to pursue an alternative course, and the parent holding company owning all of the stock of Trust Company was substituted as general partner.  This leads to the present opinion request.  The owners of the holding company are now considering dissolving the holding company and taking ownership of the Trust Company directly, which will necessitate the selection of a new general partner. Trust Company has again expressed an interest in serving as general partner of the Partnership, if permissible under current Texas law.

The primary reason identified by the Department in disapproving the Trust Company's previous investment in the Partnership was long-standing policy that a state bank or trust company may not own a general partnership interest in, or act as a general partner in, any partnership.  Indeed, this was, and continues to be, the general rule applicable to national banks and trust companies (discussed further below).  In reaching its conclusion that it was unlawful for Trust Company to serve as the general partner the Department pointed out in the opinion letter that Texas law precluded Trust Company from making an investment that would expose it to unlimited liability for the actions of the Partnership.  In addition, the Department also cited the following issues:  that the Partnership agreement did not require that all limited partners be trust company clients; that the Partnership might enable the Trust Company to circumvent applicable state law because its relationship with its trust account holders, as limited partners, could possibly no longer be subjected to the provisions of state law and the Department's scrutiny; and finally, that Trust Company's interests, duties, or obligations as general partner might dictate that it take actions that are not in the best interests of the trust account holders invested in the Partnership.

Despite numerous changes in Texas law since that opinion was issued, including the enactment of Texas Revised Civil Statutes Annotated, arts. 342a-1.001 et seq. (the "Texas Trust Company Act") [now Finance Code §§181.001 et seq.], all of the issues articulated in that March 16, 1993 opinion letter are present today.  Accordingly, it is my opinion that Trust Company may not serve as general partner of the Partnership under current Texas law.

Similarly, a trust company may invest its secondary capital in any type or character of equity or investment securities for the purpose of generating income or profits.4  Likewise, a trust company is required to exercise prudent judgment in all trust company investments of secondary capital.5  Despite this broad grant of authority, a trust company is prohibited from making an investment of its secondary capital in any investment that incurs or may incur, under regulatory accounting principles, a liability or contingent liability for the state trust company, without the prior written approval of the banking commissioner.6  Further, a trust company is prohibited from investing its funds in trade or commerce by owning or operating a business not part of the state trust business.7

Accordingly, it is clear that Texas law continues to prohibit a state trust company from investing in a partnership if the investment will expose the state trust company to unlimited liability for the actions of the partnership.  Moreover, Texas law continues to prohibit a state trust company from investing its funds in a business not part of the state trust company (as did former Article 342-503, Texas Banking Code).  Therefore, for the same reasons cited in the Department's previous opinion letter, a state trust company is not permitted to serve as general partner of a limited partnership under current Texas law.

As discussed above, this is the same conclusion that would be reached for national banks and trust companies.  As a general rule, a national bank may not enter into a partnership because it lacks authority to assume liability for the actions of its partners.8  The Office of the Comptroller of the Currency has, however, permitted national banks to invest in partnerships where the bank's partnership liability is in some way limited, provided such investments are restricted to investments in limited partnerships that engage solely in activities in which a national bank may engage.9  Similarly, under Texas law a state trust company would be permitted to invest in partnership interests, provided the investment complied with the limitations and restrictions pertaining to state trust company investments, summarized above.  This would include, of course, the requirement that the state trust company's partnership liability be in some way limited.

Opinion No. 98-31

The existence of a separate, subsequently executed representation letter from a borrower, stating that the Bank is not obligated to extend funds under an outstanding commitment if funding would cause disbursements outstanding to exceed the lending limit, does not constitute a legally enforceable modification of the terms of commitments in excess of the Bank's legal lending limit.

October 12, 1998

Randall S. James, Deputy Commissioner

This letter is in response to Senior Vice President ***'s letter to me requesting reconsideration of the position expressed in the *** 1997 Report of Examination that the Bank's loan commitments to ***, Inc., and affiliates ("Borrower") constituted an extension of credit in excess of the Bank's legal loan limit.

As I understand the situation, based on the examination report and your letter, the Bank enters into loan commitments with Borrower for interim construction financing of one or more individual homes on a periodic and continuing basis. These commitments are not entered into without a commitment from the ultimate purchaser of these homes for permanent financing upon completion. The Bank monitors disbursements under these commitments, and payments received from Borrower upon completion of the homes, to assure that the actual aggregate disbursed balance of the loans does not exceed the Bank's legal lending limit. As I understand it, no instances were noted in which the funded balances exceeded the lending limit. However, because new commitments are made over a period during which other commitments mature and are paid-off, the aggregate amount of commitments outstanding frequently exceeds the Bank's lending limit, sometimes by a substantial amount. The problem which arises is that, under rule 7 TAC §12.4, binding commitments are combined with all other extensions of credit in determining whether the legal lending limit has been exceeded.

The Bank does not dispute that the amount of outstanding commitments to Borrower has at times exceeded the Bank's $*** loan limit, having reached over $***, or more than twice the Bank's lending limit, subsequent to ***, 1997. The question set forth in your letter is, rather, whether the existence of a separate letter from Borrower stating that the Bank is not obligated to extend funds under a commitment if such would cause disbursements outstanding to exceed the lending limit renders these commitments in excess of the legal lending limit not "binding." In other words, does the letter effect a legally enforceable modification of the terms of the individual loan commitments? If it does, then only outstanding balances would be used to determine whether the Bank's lending limit had been exceeded.

One principal concern is that the Bank's right to refuse disbursements in excess of the legal lending limit is not part of the individual contracts. As you correctly point out in your letter, these are "individually approved loans rather than under a line of credit." A line of credit is subject to a master agreement which governs all disbursements, and a modification of the master agreement would clearly apply to subsequent disbursements. Here, however, even though the Bank's relationship with Borrower functions in many ways like a line of credit, the actual form is a series of discrete, closed-end loans, the terms of which are expected to be contained wholly within the documents related to that loan. You agree with this in the third paragraph of your letter, stating that the Construction Loan Agreement executed with each commitment incorporates limitations set forth in "Related Documents," and that "Related Documents" are defined as ". . .all other instruments, agreements, and documents, whether now or hereafter existing, executed in connection with the indebtedness." The problem with this argument is that the Borrower letter was not executed "in connection with the indebtedness," since the "indebtedness" referred to must be construed to be that individual loan, not the overall indebtedness of Borrower. The quoted language therefore cannot be relied upon to make the Borrower letter part of the individual contracts.

Given this, there is, at best, considerable doubt about the efficacy of the Borrower letter in giving the Bank a right to refuse disbursements under any individual loan commitment based on the aggregate funded balances under all commitments. Because of this doubt, our position must be that the violations noted in the examination report are valid, and must be corrected.

Our concern over this issue is heightened by the fact that the courts have traditionally been unsympathetic toward banks that raise a lending limit defense to a claim for damages resulting from a refusal to meet a loan commitment. For a recent and precautionary example, I would invite the Board to review the case of Int'l Bank of Commerce- Brownsville v. Int'l Energy Dev. Corp., [981 S.W.2d 38 (Tex. App.-Corpus Christi , June 18, 1998, no writ)]. In that case, IBC had refused to fund requests made under a $9MM loan commitment because its lending limit was only $1.35MM. IBC argued that its non-performance should be excused because the $9MM commitment was illegal, and an illegal contract is unenforceable. The Court rejected this argument, noting that the facts that made the original commitment illegal were known only to IBC, and that IBC would not be permitted to be the beneficiary of its own misconduct. In addition, the Court held that the contract was not illegal per se, because it could have been performed legally if IBC had obtained a participant for the over line amounts. IBC failed to do so, but that did not render the contract illegal. The Court upheld an arbitration award that cost the bank over $2.5MM (after offsets).

If the Bank wishes to continue its present practices with regard to the Borrower loans, you should obtain an opinion from legal counsel that the current documentation on these loans, including the Borrower letter, allows the Bank to refuse disbursements under existing Borrower commitments, without subjecting the Bank to liability for so doing, and submit that opinion to this office for review.

In lieu of current practice, there are several alternatives which we believe would also resolve this issue. First, the loans could be extended under a "line of credit." The line could then be granted up to the Bank's lending limit, with the normal sequencing of draws and payoffs resulting in the same disbursed balances as under the current arrangement. Second, the Bank could arrange for over limit participation agreements with other lenders to cover any commitment amounts which exceed the Bank's lending limit. Such an agreement would have to comply with 7 TAC §12.3(3). And third, the loans could continue to be disbursed under individual commitments if each contract had explicit language that the Bank would not be obligated to disburse funds under that agreement if such a disbursement would result in the aggregate Borrower balances exceeding the Bank's legal lending limit. If this option is selected, the contract should clearly state which entity balances will be aggregated, the funded aggregate balances outstanding at the time of the commitment, and the Bank's lending limit.

The law and the rules are written to limit the risk to the Bank inherent in an over-concentration of loans to any one borrower, and to provide clarity and certainty in calculating the dollar limitation. The Bank may be placing itself in an untenable position by beginning funding on more individual projects than it could legally fund to completion. Such a practice raises serious safety and soundness concerns, and must be avoided.

Opinion No. 98-27

The responsible federal banking agency may approve a merger transaction between insured banks with different home states, one of which is Texas, without regard to Texas Constitution Art. XVI, §16(a).

July 30, 1998

Everette D. Jobe, General Counsel

By letter dated July 30, 1998, you advise us that the Federal Reserve Bank of *** has asked for the legal basis under Texas law for the proposed merger of [Bank-Texas] with and into [Bank-Other State], in light of Texas Finance Code §32.0095, which purports to prohibit the transaction. In that connection, you request our opinion regarding whether Texas law prohibits a federal banking agency from approving a merger transaction under 12 USC §1828(c) between insured banks with different home states, one of which is Texas.

Beginning on June 1, 1997, 12 USC §1831u(a)(1) authorizes federal approval of "a merger transaction under section 1828(c) of this title between insured banks with different home States, without regard to whether such transaction is prohibited under the law of any State," unless a prohibiting state law exists that meets the requirements of 12 USC §1831u(a)(2) (emphasis added). Among other requirements, the state law must have been enacted after September 29, 1994, and before June 1, 1997, and apply equally to all out-of-State banks.

Texas Constitution Article XVI, §16(a), provides that "[n]o foreign corporation, other than the national banks of the United States domiciled in this State, shall be permitted to exercise banking or discounting privileges in this State." This sentence has remained unchanged in the Texas Constitution since it was added by amendment effective November 8, 1904, and fails to meet the requirement of 12 USC §1831u(a)(2)(A) that, to be validly recognized under federal law, it must have been enacted after September 29, 1994, and before June 1, 1997.

In 1995 the Texas legislature attempted to prohibit interstate merger transactions, as permitted by 12 USC §1831u(a)(2), by enacting Texas Civil Statutes Article489f, codified in 1997 as Texas Finance Code §32.0095.1 As the Comptroller of the Currency pointed out in her Decision on the Application of NationsBank of Texas, N.A. and NationsBank, N.A. (OCC Corporate Decision #98-19, April 2, 1998), this attempt failed to meet the requirement of 12 USC §1831u(a)(2)(A)(I) that the state law apply "equally to all out-of-State banks." Specifically, other Texas law expressly permits an out-of-State state savings bank to engage in an interstate merger with a domestic savings bank and thereafter operate as a branch office in Texas, see Texas Finance Code §§92.401 et seq. Therefore, Texas Finance Code §32.0095 does not apply equally to all out-of-State banks because an out-of-State state savings bank is a "bank" for purposes of 12 USC §1831u(a)(2)(A)(I), see 12 USC §1813(a)(1) and (2).

In our opinion, pursuant to 12 USC §1831u(a)(1), the responsible federal banking agency may approve a merger transaction between insured banks with different home states, one of which is Texas, without regard to Texas Constitution Article XVI, §16(a), because that provision was not enacted after September 29, 1994, and before June 1, 1997, or Texas Finance Code §32.0095,1 because that provision does not prohibit an interstate merger transaction in the manner required by federal law by applying equally to all out-of-State banks.

Other Texas law continues to apply to a merger transaction between insured banks with different home states, one of which is Texas, including Texas Finance Code §§38.001-38.003 and 59.001 [now Finance Code §§202.001-202.003, 203.001, and 203.003-203.005] and 59.001 [now 201.102]. We anticipate full compliance with these provisions as well as any other applicable Texas law.

Opinion No. 98-25

A state bank may sell promotional goods in the bank lobby.

July 13, 1998

D'Ann Johnson, Assistant General Counsel

Your letter to Catherine A. Ghiglieri dated July 6, 1998, has been referred to me for response.

You have requested an opinion whether a state bank may sell promotional goods in the bank lobby. This activity is permissible for state banks.

According to your letter, the bank intends to offer T-shirts, golf shirts, baseball caps and similar products with the bank's logo emblazoned on the item. The items will be sold at cost, including shipping and handling. The bank will not make a profit on the sale, but simply to promote its name to the public.

A state bank may exercise incidental powers necessary to carry on the business of banking, Tex. Fin. Code §32.001(b)(1). Advertising activities are activities traditionally performed by banks. Banks have long engaged in solicitation of prospective customers. See, Franklin National Bank of Franklin Square v. New York, 347 U.S. 373, 377 (1954). The Franklin court recognized that advertising is a usual and customary business practice. In conducting their business, bankers have used many strategies to sell the banks' services, including the mail, the telephone, the internet, the news media, billboards and little league team sponsorships.

The activity you describe clearly falls within incidental banking powers of a state bank.

The sale of promotional goods does not violate Tex. Fin. Code §34.107, which prohibits a bank from engaging in commerce or operating a business that is not a part of the business of banking.

This opinion is limited to the facts and circumstances stated in your letter of July 6, 1998. Any change in these facts or circumstances may result in a different opinion.

Opinion No. 98-21

An appropriately licensed state bank may sell crop insurance as agent or refer customers to an outside agent and receive a portion of commissions generated as a result of referrals.

May 20, 1998

Everette D. Jobe, General Counsel

By letter dated April 27, 1998, you referred to two recent interpretations issued by the Office of the Comptroller of the Currency (OCC) and inquired whether a state bank can take advantage of those rulings. A state or national bank in Texas is unaffected by these interpretative letters in that Texas law already permits the activities authorized.

In OCC Interpretive Letter No. 812 (Dec. 29, 1997), the OCC concluded that a national bank may offer, as agent, multiple peril crop insurance and hail/fire insurance (collectively, "crop insurance") in connection with loans to its farmer customers, because the sale of such credit related insurance is part of, or incidental to, the business of banking. You suggest that the significance of this letter is to authorize the sale of crop insurance as an "incidental power" under 12 USC §24(Seventh) rather than as an insurance power under 12 USC §92, thereby avoiding the "place of 5,000" limitation on insurance agent activities (§92 impliedly bars national banks in towns with more than 5,000 inhabitants from engaging in insurance agency activities in general). Because the "place of 5,000" limitation does not apply to the activities of a bank as crop insurance agent in Texas, this interpretation does not affect banks in Texas.

Under Article 21.14-2 of the Texas Insurance Code, any resident of Texas, including a bank, may become a crop insurance agent under a two-year, renewable license by submitting a completed written application to the commissioner of insurance on a form prescribed by the commissioner and pay a $50 nonrefundable fee. The application must bear an endorsement signed by an agent of an insurance company that limits its insurance business to the transaction of the business of insurance of risks on growing crops. The applicant for an original or renewal license is not required to pass an examination or meet any basic or continuing educational requirements to obtain or renew the license. I am told that most production credit associations are licensed as crop insurance agents but banks for whatever reason have not taken advantage of this provision.

In OCC Interpretive Letter No. 824 (Feb. 27, 1998), the OCC analyzed a proposed activity by a national bank, located in a "place of 5,000" and appropriately licensed as an insurance agency, described as involving customer referrals to an outside agent and the distribution of informational materials on insurance, for which the national bank receives a percentage of the premium, commission, or net income generated as a result of the bank's referrals. The OCC concluded the activity was permissible for a national bank on two alternative grounds. First, to the extent that the described activities constitute acting as an agent to sell insurance, they are within the scope of activities permitted by 12 USC §92. Second, a national bank may engage in permissible insurance-related finder activities and receive a fee for these activities based on 12 USC §24(Seventh) rather than on 12 USC §92, see 12 CFR §7.1002.

Based on the second "finder activities" ground, your letter seems to imply that agent licensing would not be required of the referring bank to permit commission splitting. That conclusion would be incorrect. As the OCC itself states on page 4 of Interpretive Letter No. 824:

Some state laws may, however, treat these finder activities as activities that constitute acting as an insurance agent under state law. Such a state law characterization does not alter the characteristics of what are permissible finder activities under federal law. But, where a state law characterizes finder activities as activities of an insurance agent, national banks should comply with the applicable state insurance licensing and other requirements.

Texas law generally prohibits commission splitting except among licensed agents. Therefore, a state or national bank in Texas may sell crop insurance as agent or refer customers to an outside agent and receive a portion of commissions generated as a result of referrals, without regard to the geographic location of the bank in a rural or urban area, provided the bank is appropriately licensed as a crop insurance agent under Texas law.

Opinion No. 98-20

An out-of-state bank and its Texas-based operating subsidiary may invoke the compliance review committee privilege in Texas law if the bank has registered to transact business in this state.

July 20, 1998

Sharon Gillespie, Assistant General Counsel

You have inquired as to whether a wholly-owned operating subsidiary in Texas of an out-of-state national bank is entitled to the privilege provided by Tex. Fin. Code §59.007(b) [now §59.009(b)].1 Under [§59.009(a)], a financial institution and/or its affiliates can "establish a compliance review committee to test, review, or evaluate the institution's conduct, transactions, or potential transactions for the purpose of monitoring and improving or enforcing transactions for the purpose of monitoring and improving or enforcing compliance with" governing laws and regulations. Generally, documents produced by a compliance review committee are confidential and not discoverable in a civil action.

In connection with the subsidiary operations in Texas, the bank has registered with the Secretary of State under §59.001(a) of the Finance Code2 to transact business in this state. The subsidiary, headquartered in Texas with offices throughout the state, engages primarily in originating and servicing first-lien residential mortgages and acts as a loan production office for the bank. The bank and its holding company have established a compliance review committee for the purpose set out in [§59.009(a)]. Section [59.009(b)] grants certain privileges regarding the discovery and admissibility of compliance review documents and, with limited exception, testimony of compliance review committee members.

Pursuant to [§59.009(a)], a "financial institution or an affiliate of a financial institution, including its holding company, may establish a compliance review committee . . . ." Section 31.002(a)(25) of the Texas Finance Code defines "financial institution" as "a bank . . . maintaining an office, branch, or agency office in this state."3 The term "bank" is defined as "a state or national bank" under §31.002(a)(2). Pursuant to §31.002(a)(37), a "national bank" is a "banking association organized under 12 USC §21." Furthermore, the term "affiliate" is defined by §31.002(a)(1) to include a company that is controlled by or under common control with a bank.

On these facts, the subject bank is a "financial institution," and its subsidiary is an "affiliate" as contemplated by [§59.009]. Consequently, the privilege afforded under [§59.009(b)] is available to a compliance review document or testimony of a compliance review committee member (as defined or otherwise limited in [§59.009]) in testing, reviewing, or evaluating the subsidiary's conduct, transactions, or potential transactions for the purpose set out in [§59.009(a)].

This opinion is limited to the facts and assumptions set out herein. Any change in those facts, assumptions, or parties to the transaction may result in a different opinion.

Opinion No. 98-18

A state bank may provide links from its web page to web pages of bank customers and provide website hosting services to bank customers.

June 9, 1998

D'Ann Johnson, Assistant General Counsel

By letter dated April 20, 1998, you inquired whether a state bank has the authority to offer a low cost web page to your business customers. We are of the opinion that this activity is permissible for state banks.

According to your letter, *** Bank currently operates its own web page and would like to offer its business customers the ability to link their services from the bank's home page. You have not indicated whether there would be any links to an insider-related company. In addition to offering the business link, the bank would allow the business customers to establish their own home pages on the bank's domain. The bank would offer a low cost web page design to the business customers for a small fee, and would charge hosting fees to these customers, but revenue generated is expected to be minimal. The bank has determined that offering this service will bring the bank's customers closer to the bank. Moreover, the bank believes the internet compatibility between the bank and its business customers will better position the bank to facilitate internet payments in the future.

The Finance Code prohibits a state bank from investing funds in trade or commerce by selling or otherwise dealing in goods or owning or operating a business not part of the business of banking, Tex. Fin. Code §34.107. However, a state bank may engage in any activity, directly or through a subsidiary authorized by the Texas Finance Code (Finance Code) or determined by the Banking Commissioner to be closely related to banking, Tex. Fin. Code §32.001(b)(4) [now in substance §32.001(b)(6), pertaining to activities financial in nature, and (b)(7)]. Additionally, a state bank may exercise incidental powers necessary to carry on the business of banking, Tex. Fin. Code §32.001(b)(1). A state bank that has acquired excess capacity in the bank's internet connection in good faith may sell the excess capacity to its business customers, Opinion No. 95-72. Providing internet capacity for itself and business customers of the bank is incidental to the business of banking. Consequently, this activity does not violate Tex. Fin. Code §34.107.

Safety and soundness must be considered. The security of the bank's computer system must remain inviolate and thoughtful precautions should therefore be taken to ensure that the system is insulated from viruses and unauthorized access to information. In addition, the bank should avoid any indication that it endorses any product or service or that products offered are FDIC-insured.

The bank should conduct the activity pursuant to a written agreement with each customer that appropriately allocates risk and should maintain complete files of the activity for examination purposes. We also recommend notifying the bank's bonding company of the new activity being conducted by the bank.

This opinion is limited to the facts and circumstances described in your letter. Any changes in the facts and circumstances could result in a different opinion.

Opinion No. 98-09

An ATM unit in an office tower lobby with restricted access is not subject to ATM safety requirements.

February 19, 1998

D'Ann Johnson, Assistant General Counsel

Your letter of February 12, 1998, has been referred to me for response. You have asked whether an ATM unit in an office tower is subject to the safety requirements of Tex. Fin. Code, §§59.301 et seq. ("ATM User Safety Act"). We are of the opinion that the ATM unit you described is not subject to the ATM User Safety Act.

According to your letter, the ATM in question is a walk-up unit located in its own vestibule inside an office/bank tower. The ATM vestibule is situated between the bank lobby and the lobby of the office tower. During banking hours, the ATM may be accessed from the bank lobby. It may also be accessed during banking hours from the lobby of the office tower.

After banking hours the ATM is accessible by way of the lobby of the office tower. In addition, there is a staffed guard station in the lobby of the office tower and it is adjacent to the ATM vestibule. A person wishing to make an ATM transaction after banking hours must enter the office tower lobby and approach the guard station and "sign in" prior to entering the ATM vestibule. That person must also "sign out" prior to exiting the office tower lobby.

The Texas Finance Code requires certain safety precautions for unmanned teller machines, Tex. Fin. Code §§59.301 et seq. The statute excludes unmanned teller machines inside a building unless a transaction can be conducted from outside the building, Tex. Fin. Code §59.302(2)(A). In addition, if there is 24 hour access to an unmanned teller machine in a bank vestibule from outside the building, the safety precautions are applicable to that location. 7 TAC §3.92(g).

The unmanned teller machine you describe is clearly located inside a building and no transaction can be conducted from outside the building. Even though there may be 24 hour access to the machine, one may access the machine only from inside the office lobby, which itself has restricted access, not from outside the building. Consequently, the unmanned teller machine is not subject to the safety requirements of Tex. Fin. Code §§59.301 et seq.

This opinion is limited to the facts and circumstances you describe. Any change could result in a different opinion.

Opinion No. 98-08

A third-party vendor may certify compliance with ATM safety requirements.

February 20, 1998

D'Ann Johnson, Assistant General Counsel

Your letter of February 12, 1998, has been referred to me for response. You have asked whether a third-party vendor may certify compliance with the safety requirements applicable to unmanned teller machines.

We are of the opinion that the owner or operator of an unmanned teller machine may designate to any person, including a third-party vendor, the task of certifying compliance with the statutory requirements.1 The security officer of a depository institution may rely on the certification to meet the requirements of 7 TAC §3.92(h), which states that the "security officer of each depository shall certify compliance with the ATM User Safety Act and this regulation on a basis no less frequently than annually."

However, such a designation does not operate to transfer any obligations of the owner or operator of an unmanned teller machine to the third-party vendor.

Opinion No. 98-02

A state bank may sell its excess marketing and advertising capacity to third-parties.

March 23, 1998

D'Ann Johnson, Assistant General Counsel

Your letter of December 26, 1997, to Everette D. Jobe, General Counsel of the Texas Department of Banking, has been referred to me for review.

You have requested an opinion whether a state bank employee who conducts marketing and advertising activities for the bank may provide marketing and advertising activities for non-bank clients. This activity is permissible for state banks.

Background

According to your letter, your bank has, in the past, outsourced bank advertising. Because of the high production cost and unsatisfactory service, you investigated the option of bringing this function in-house. You have located a suitable candidate for this position at a salary less than the current cost for outsourcing this function. As a practical matter, the bank cannot currently utilize an employee full-time for these activities, but the most suitable candidate will not accept less than a full-time position. The candidate has offered to continue servicing her existing accounts and pay the revenue to the bank.

Discussion

A state bank may exercise incidental powers necessary to carry on the business of banking, Tex. Fin. Code §32.001(b)(1). Advertising activities are activities traditionally performed by banks. Banks have long engaged in solicitation of prospective customers. See, Franklin National Bank of Franklin Square v. New York, 347 U.S. 373, 377 (1954). The Franklin court recognized that advertising is a usual and customary business practice. In conducting their business, bankers have used many strategies to sell the banks' services, including the mail, the telephone, the internet, the news media, billboards and little league team sponsorships. A bank may contract with a third-party to provide advertising, direct mail, or telemarketing services or the bank may conduct such activities itself. The bank may hire an employee to perform advertising functions because such functions are incidental to banking.

A state bank that acquires excess capacity in good faith to meet the needs of the bank may use the excess capacity profitably even though the activities involving the excess capacity are not themselves incidental to the business of banking. Such a rationale reflects the notion that the bank would incur economic waste if the bank could not make full use of an asset, including an employee. We have not previously addressed the issue of whether the under-utilization of an employee could be considered excess capacity. We conclude that it does.

Several factors influence a determination on whether the utilization of excess capacity is acquired in good faith. In this case, the bank has decided to conduct its marketing and advertising activities itself. This proposal benefits the bank and its customers by minimizing its advertising costs and enabling the bank to better compete with larger institutions. It is clear that the bank cannot divest itself of the excess capacity since all of the excess is represented by one individual with special expertise. Moreover, it is possible the banks' utilization of the employee could increase. The salary requirements of the candidate are less than the cost of outsourcing these activities. And failure to use the excess capacity would result in loss of income to the bank. Thus, it appears that the bank has acquired the excess capacity in good faith.

A state bank may provide customers with advertising services as a permissible use of its excess capacity acquired in good faith. Consequently, the sale of excess advertising capacity does not violate Tex. Fin. Code §34.107, which prohibits a bank from engaging in commerce or operating a business that is not part of the business of banking.

However, the utilization of the employee to perform advertising services for other clients is not without risk. As with dual employees, there is a concern about divided loyalties or conflict of interest. In addition, to avoid confusion, the employee must disclose the nature of her employment to the other clients. The bank should enter into a written agreement with the existing advertising account customers. The bank should develop an appropriate job description and policies and procedures to supervise and monitor the sale of excess advertising capacity. It is our understanding that the bank intends to obtain a liability policy to insure against losses arising from this activity. The bank may not expand the sale of advertising capacity beyond the employment of one person. As long as the bank has excess capacity, it may renew the contracts.

This opinion is limited to the facts and circumstances stated in your letter of December 26, 1997, and subsequent communications. Any change in those facts or circumstances may result in a different opinion.

Opinion No. 98-01

A state bank may acquire a company that provides software and consulting services.

January 28, 1998

D'Ann Johnson, Assistant General Counsel

This letter is in response to your letter dated December 24, 1997. You have requested confirmation that a state bank may acquire a company engaged in providing software and consulting services to depository institutions as a subsidiary.

According to your letter, the business of the company consists of developing and maintaining software packages for modeling and tracking interest rate and other risks of depository institutions as well as providing related telephone support services.

The activity you propose is clearly permissible for state banks. Monitoring interest rate and other risks are functions traditionally performed by banks.

A state bank may engage in any activity, directly or through a subsidiary, authorized by the Texas Finance Code or determined by the Banking Commissioner to be closely related to banking, Tex. Fin. Code §32.001(b)(4) [now in substance §32.001(b)(6), pertaining to activities financial in nature, and (b)(7)].  Additionally, a state bank may exercise incidental powers necessary to carry on the business of banking, Tex. Fin. Code §32.001(b)(1). This activity is not barred by Tex. Fin. Code §34.107, which prohibits a state bank from investing funds in trade or commerce by selling or otherwise dealing in goods or owning or operating a business not part of the business of banking.

We view the contemplated activities you describe as activities that may be engaged in directly by the bank, and therefore conclude that your bank may acquire a company providing such software and consulting services to other depository institutions.

A state bank may conduct any activity through an operating subsidiary that a state bank is authorized to conduct if the subsidiary is adequately empowered and appropriately licensed to conduct its business. Tex. Fin. Code §34.103(a).

The bank must comply with the notice requirements of Tex. Fin. Code §34.103. The Corporate Division should be contacted for specific requirements for the acquisition of operating subsidiaries, including fees. Importantly, the bank must demonstrate Year 2000 compliance.

This opinion is limited to the facts and circumstances stated in your letter of December 24, 1997. Any change in those facts or circumstances may result in a different opinion. Please notify the Department.

Opinion No. 97-24

Out-of-state bank can "table fund" loans originating in Texas (closed by an agent) without filing or registration.

July 10, 1997

Jerry G. Sanchez, Assistant General Counsel

Your letter dated June 12, 1997, addressed to Lynda Drake, has been forwarded to me for reply. You inquired as to whether a license or approval is required of the Department in order for [*****] (the "Bank") to table fund commercial loans in Texas. You have also inquired as to whether the Department must approve or review a notice to do business in Texas which will be filed with Texas Secretary of State.

The Bank is interested in table funding commercial loans in Texas. You have represented that the Bank will not have a physical location or office in Texas. All decisions relating to loan approval or disapproval will be made at the Bank's out-of-state home office; however, the Bank will work with financial institutions, packagers, or third parties in Texas to finance business loans. The third party will act as the Bank's "agent" to assist in executing loan documents and funding the loans. The Bank will wire the loan proceeds and the loans will be closed in the Bank's name.

Texas law does not prevent out-of-state banks from table funding commercial loans in Texas. However, Texas law may require the bank to designate the Texas Secretary of State as its agent for service of process in Texas,1 and its advertising in Texas must not be misleading. See Tex. Rev. Civ. Stat. Ann. art. 342-8.003 [now see Finance Code §201.101 et seq.]. The Department does not need to review or approve the Texas Secretary of State designated agent filing.

Finally, please be advised that should the Bank decide to table fund consumer loans in the future, the Bank may need to comply with certain licensing and registration requirements of the Office of Consumer Credit Commissioner.

This opinion is limited to the facts and circumstances stated in your letter dated June 12, 1997. Any change in those facts or circumstances could result in a different conclusion.

Opinion No. 97-20

Statutory age limits applicable to interstate acquisition of a bank are satisfied by acquisition of an existing state bank charter sold separately from the bank assets.

April 29, 1997

Everette D. Jobe, General Counsel

Deputy Commissioner Randall James asked me to articulate the basis in state law for a merger between two banks with both surviving the transaction, and the subsequent sale of one charter to new owners, as well as the interaction between state law and federal law as amended by the Riegle-Neal Interstate Banking and Branching Act of 1995.

"Interstate banking," the ownership of an in-state bank charter by an out-of-state bank holding company, was initially authorized in Texas in 1986. The Legislature amended the Banking Code by enacting what was called the Interstate Banking bill, Acts 1986, 69th Leg., 2nd C.S., ch. 14, effective January 1, 1987. The bill was intended to constitute specific authorization, as required by federal law (12 USC §1842(d) as then in effect), for an out-of-state bank holding company to acquire a bank located in Texas. The last sentence of Tex. Const., art., §16(a), of the Texas Constitution created a potential problem for the Interstate Banking bill in that it provides that "no foreign corporation, other than the national banks of the United States domiciled in this State, shall be permitted to exercise banking or discounting privileges in this State." This difficulty was eliminated by a Texas Attorney General Opinion (No. JM-630) which held that the constitutional provision prohibits foreign corporate exercise of banking or discounting privileges in Texas but not foreign corporate ownership of a Texas bank.

"Interstate branching," on the other hand, would constitute foreign corporate exercise of banking or discounting privileges in Texas as prohibited by the Texas Constitution. Riegle-Neal was designed to preempt any limitation on interstate branching like that in the Texas Constitution unless the state specifically "opted out" of interstate branching. Texas did opt out, Tex. Rev. Civ. Stat. Ann. art. 489f [now repealed Finance Code §32.0095].1

Tex. Rev. Civ. Stat. Ann. arts. 342-3.301 et seq. (the Texas Banking Act, §§3.301 et seq.) [now Finance Code §§32.301 et seq.], govern mergers involving state banks if a state bank is to be a survivor of the transaction. Section 3.301(a) [now Finance Code §32.301(a)] provides in pertinent part that "[t]wo or more financial institutions, corporations, or other entities with all requisite legal authority to participate in a merger, at least one of which is a state bank, may adopt and implement a plan of merger in accordance with this section." Section 3.301(b) [now Finance Code §32.301(b)] provides that "Implementation of the merger by the parties and approval of the board, shareholders, participants, or owners of the parties must be made or obtained in accordance with the Texas Business Corporation Act as if the state bank were a domestic corporation and all other parties to the merger were foreign corporations and other entities, except as may be otherwise provided by applicable rules. Section 3.301(c) [now Finance Code §32.301(c)] states that "[a] consummated merger has the effect provided by the Texas Business Corporation Act."

The definition of "merger" under state law is provided by the Texas Business Corporation Act (TBCA). Under TBCA, art. 1.02(A)(12):

"Merger" means (a) the division of a domestic corporation into two or more new domestic corporations or into a surviving corporation and one or more new domestic or foreign corporations or other entities, or (b) the combination of one or more domestic corporations with one or more domestic or foreign corporations or other entities resulting in (i) one or more surviving domestic or foreign corporations or other entities, (ii) the creation of one or more new domestic or foreign corporations or other entities, or (iii) one or more surviving domestic or foreign corporations or other entities and the creation of one or more new domestic or foreign corporations or other entities.

Thus, statutory language clearly includes a traditional merger, consolidation, split-up, split-off, and any other form of business combination or recombination within the modern definition of "merger," and any number of participants and survivors are permitted. This inherent flexibility is in the nature of modern corporate law, law that is now applicable to (and available to) Texas state-chartered banks.

If, as a result of a merger, a state bank loses most of its assets and some or all of its pre-existing banking business, yet survives, the bank is legally still in existence as an incorporated entity, although regulatory consent or forbearance would obviously be required to permit the bank to engage in future banking business. The net result of such a transaction is very similar to the result of a more traditional transaction, a purchase and assumption. The remaining charter of the selling or merging yet surviving bank, legally still in existence as an incorporated entity, can theoretically be sold to an out-of-state bank holding company in an "interstate banking" transaction if the requirements of the Texas Banking Act, §§8.301 et seq. [now Finance Code §§202.001 et seq.], are met.

Restrictions regarding age limits and deposit concentrations are clearly permissible in interstate bank charter acquisitions under federal law as amended by Reigle-Neal, see 12 USC §1842(d). Under the Texas Banking Act, §8.303(a) [now Finance Code §202.003(a) in substance; also see §203.005(a)]:

An out-of-state bank holding company may not make an acquisition ... unless each bank in this state that would on consummation of the acquisition be directly or indirectly controlled by the out-of-state bank holding company has existed and continuously operated as a bank at least five years.

Under the Texas Banking Act, §8.302 [now Finance Code §202.002(a) in substance; also see Finance Code §§32.304, 32.406, and 203.004(a)]:

[A] bank or bank holding company may not acquire control of or acquire all or substantially all of the assets of a bank located in this state or of a bank holding company that controls a bank in this state if the acquiring bank or bank holding company and all its insured depository institution affiliates controls, or after consummation of the acquisition would control, more than 20 percent of the total amount of deposits of insured depository institutions located in this state, as reported in the most recently available reports of condition or similar reports filed with state or federal authorities. For purposes of this section, "deposit" and "insured depository institution" have the same meanings assigned by Section 3, Federal Deposit Insurance Act (12 USC Section 1813).

We interpret the age limits in [Finance Code §§202.003(a) and 203.004(a)], as a public policy device to enhance the value of existing state banks by preventing out-of-state entry into the state through acquisition of a de novo charter. That policy is not violated, and is in fact enhanced, by permitting the charter to simultaneously be sold separately from the bulk of the assets, provided the combined transactions involve only one out-of-state bank holding company availing itself of the age on the charter.

Opinion No. 97-19

Debt to a partnership and a related Subchapter S corporation, both guaranteed by the same person, must be aggregated for legal lending limit purposes due to financial interdependence of the borrowers.

May 7, 1997

Jerry G. Sanchez, Assistant General Counsel

This letter is in response to your letter dated April 15, 1997. You requested an opinion as to whether a proposed $850,000 loan by [***** Bank] (the "Bank"), to the [***** Partnership] (the "Partnership"), to be fully guaranteed by [*****] ("Guarantor"), should be aggregated with the outstanding indebtedness of [***** Corporation] (the "Corporation"), a Subchapter S corporation, consisting of three loans totaling $979,672.03 guaranteed by Guarantor, for legal lending limit purposes.

Based solely on the information in your letter and subsequent telephone conversations between you and my office, my understanding of the facts are as follows:

1.   Two entities are involved: the Corporation and the Partnership;

2.   Guarantor owns 49% of the Corporation, and as a shareholder, receives dividends from the Corporation; Guarantor will own a majority interest of the Partnership (Guarantor's family members will constitute the remaining partners);

3.   The Corporation's three outstanding loans are personally guaranteed by Guarantor (limited and full guarantees);

4.   Guarantor is the Chairman of the Board and Vice-President of the Corporation, but earns no salary;

5.   The proceeds of the proposed Partnership loan will be utilized to purchase improved real estate (a medical clinic) which will be leased to the Corporation and the improved real estate will secure the Partnership loan;

6.   Guarantor will fully guarantee the proposed Partnership loan;

7.   The Corporation will not be party to the proposed Partnership loan;

8.   100% of the gross receipts of the Partnership (on an annual basis) will be derived from income received from the medical clinic lease with the Corporation;

9.   The Bank has represented that the primary source of repayment of the proposed Partnership loan will be derived from income received from the medical clinic lease; although, the Bank has represented that Guarantor has sufficient secondary income to service the Partnership loan should the lease payments cease; and

10. The Bank has represented that the primary source of repayment of the three Corporation loans is derived from the Corporation's income (medical services), and not Guarantor's guarantees.

Under Tex. Rev. Civ. Stat. Ann. art. 342-5.201(a) (the "Act") [now Finance Code §34.201(a)], the total loans and extensions of credit by a state bank outstanding at any one time to a person may not exceed 25 percent of the bank's capital and certified surplus.1 The term "loans and extensions of credit" is defined in the Act, §1.002(a)(34) [now Finance Code §31.002(a)(34)], as "...direct or indirect advances of funds by a state bank to a person that are conditioned on the obligation of the person to repay the funds or that are repayable from specific property pledged by or on behalf of the person."

Under 7 TAC §12.9(a)(1), a loan or extension of credit to one borrower is attributed to another person, and each person will be considered a borrower if a "common enterprise" is deemed to exist. Under 7 TAC §12.9(c)(1), a "common enterprise" is considered to exist and loans to separate borrowers will be aggregated if a loan or extension of credit is made to borrowers who are related directly or indirectly through common control, or made to a borrower directly or indirectly controlled by another borrower, if substantial financial interdependence exists between or among the borrowers. Under §1.002(a)(13) of the Act [now Finance Code §31.002(a)(13)], "control" means the ownership of or ability or power to vote, directly, acting through one or more other persons, or otherwise indirectly, 25% or more of the outstanding shares of a class of voting securities. Under 7 TAC §12.9(c)(2), "substantial financial interdependence" exists if 50% or more of one borrower's gross receipts or gross expenditures (on an annual basis) are derived from transactions with the other borrower and is presumed to exist, subject to rebuttal, if 25% or more of one borrower's gross receipts or gross expenditures (on an annual basis) are derived from transactions with the other borrower. Gross receipts and expenditures include gross revenues and expenses, intercompany loans, dividends, capital contributions, and similar receipts and payments.

The Corporation and the Partnership are related through common control because Guarantor owns 49% of the Corporation and a majority interest in the Partnership. Further, "substantial financial interdependence" exists between the Corporation and the Partnership because 100% of the Partnership's gross receipts (on an annual basis) will be derived from the real estate lease proceeds to be received from the Corporation. In essence, the Partnership will provide the physical facilities to be operated as a medical clinic by the Corporation. Therefore, under 7 TAC §12.9(a)(2) and (c), a "common enterprise" is deemed to exist between the Corporation and the Partnership and the proposed Partnership loan will be aggregated with the Corporation's outstanding indebtedness.

Also, please be advised that should Guarantor subsequently incur any individual indebtedness at the Bank, that indebtedness and his guarantees of the Corporation's indebtedness may be aggregated under 7 TAC §12.9(g).

Your bank is cautioned that the purpose of the lending limit is to reduce risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of a bank's funds. These types of loans will be closely scrutinized by an examiner.

Finally, this opinion is limited to the facts and circumstances set forth in your letter, dated April 15, 1997, and subsequent telephone conversations between you and my office. Any change in the facts, circumstances, or the parties to this transaction may result in a different opinion.

Opinion No. 97-12

Loans under programs of the Export-Import Bank would generally be exempt from the legal lending limit but the conditions and claims experience of each program must be reviewed before determining exemption.

October 14, 1997

D'Ann Johnson, Assistant General Counsel

This is in response to your letter of February 12, 1997. I received additional information from you on August 27, 1997. You have requested a blanket exemption from the legal lending limits on loans to the extent the loans are guaranteed or insured by the Export-Import Bank of the United States for state-chartered banks. In addition, you have requested that the same percentage capital risk weights be assigned to Ex-Im Bank guarantees and insurance policies for state-chartered banks as national banks.

Exemption

The total loans and extensions of credit outstanding at one time by a state bank to a person may not exceed 25% of the bank's capital and certified surplus. Tex. Fin. Code §34.201(a).1  However, certain classes of loans or obligations are excluded from this limitation.

The Ex-Im Bank is an independent corporate agency of the United States, which is empowered to provide guarantees, insurance, and extensions of credit to aid in the financing of imports and exports. See, 12 USC §635(b)(1)(A). Contractual liabilities of the Ex-Im Bank incurred pursuant to its authority constitute full faith and credit obligations of the United States. 42 Op. Atty. Gen. 327 (1966).

Consequently, loans guaranteed by Ex-Im Bank may be exempt from loan limitations. Pursuant to the Tex. Fin. Code §34.201(a)(8), loan limitations do not apply to:

the portion of an indebtedness that this state, an agency or political subdivision of this state, the United States, or an agency or instrumentality of the United States has unconditionally agreed to purchase, insure, or guarantee.2

A loan will not qualify for this exception unless the insurance or guarantee is unconditional. "A takeout commitment insurance or guarantee is considered unconditional if the protection afforded the bank is not substantially diminished or impaired if the loss should result from factors beyond the bank's control. Protection against loss is not materially diminished or impaired by procedural requirements such as an agreement to take over only in the event of default, including default over a specific period of time, a requirement that notification of default be given within a specific period after its occurrence, or a requirement of good faith on the part of the bank." 7 TAC §12.6(f). This regulation also requires that the commitment or guarantee is payable only in cash or its equivalent within 60 days after demand for payment is made. Id. The exception to the lending limit provision applies only to the portion of the credit actually covered by a guarantee or Ex-Im Bank insurance policy.

This Department has previously exempted several Ex-Im Bank programs from the legal lending limit. See Opinion 94-02a (New to Export Credit Insurance Policy); Opinion 94-38 (Short Term Comprehensive Single Buyer Export Credit Insurance Policy); Opinion 94-60 (Medium-Term Comprehensive Export Credit Program); and Opinion 94-73 (Working Capital Guarantee Program).

I have reviewed the claims experience of the Working Capital Guarantee Program. It appears from this information that the claims were denied only because the lender did not conform to the terms of the guarantee agreement by not perfecting liens on collateral, lack of timely notification of default or claim filing, or amending terms without Ex-Im Bank's approval. The Department does not consider these types of conditions to be so significant as to cause the guarantee to be considered conditional. 7 TAC §12.6(f). No claims experience information was submitted regarding other Ex-Im Bank programs.

In general, Ex-Im Bank programs would be exempt from legal lending limits. As a caveat, however, the precise conditions and the claims experience of each program is critical to the determination whether the insurance or guarantee is conditional. The Department declines to give a blanket exemption from the legal lending limits for every future Ex-Im Bank program and prefers to consider each one on a case-by-case basis.

Capital Risk Assessment

Federal standards for capital risk assign 0% risk to Ex-Im Bank's Medium and Long Term Guarantee Programs and 20% risk to the Working Capital Guarantee Program. The Texas Department of Banking agrees with the federal risk assessment of these programs.

Opinion No. 97-06

A state bank cannot sell phone cards as principal but may allow a third party to sell phone cards on premises or sell phone cards as agent for a merchant customer.

March 20, 1997

Jerry G. Sanchez, Assistant General Counsel

Commissioner Ghiglieri has requested that I respond to your letter dated January 21, 1997, regarding the sale of prepaid telephone cards.  According to your letter, the Bank requests an opinion as to the permissibility of engaging in the following two activities involving the sale of prepaid phone cards:

1.  The Bank will purchase an inventory of prepaid phone cards which it will sell to its customers at more than face value and earn a profit from each transaction; and/or

2.  An independent third-party, a customer of the Bank (the "Merchant"), will sell prepaid phone cards on the Bank's premises for approximately one month and the Bank will receive no compensation from the sale of the phone cards or for the use of the bank's premises.

You have represented that the Merchant has introduced a line of commemorative prepaid telephone cards featuring local athletes. A portion of the proceeds from the prepaid phone card sales will be donated the non-profit [*****] fund. The prepaid phone cards are not tied to a customer's account and are not "reload-able."

Bank's Direct Sale of Prepaid Phone Cards

Under §3.001(a)(4) of the Texas Banking Act (the "Act" ), a state bank may engage in any activity, directly or through a subsidiary, authorized by the [Finance Code] or determined by the Banking Commissioner to be closely related to banking [now in substance Finance Code §32.001(b)(6), pertaining to activities financial in nature, and (b)(7)]. The Act, §3.001(a)(1) [now Finance Code §32.001(b)(1)], gives state banks incidental powers that are "necessary" to carry on the business of banking as provided by the [Finance Code]. "Necessary" has been judicially construed to mean "convenient or useful." Arnold Tours, Inc. v. Camp, 472 F.2d 427, 432 (1st Cir. 1972). Similarly, courts have applied the following three factors in analyzing whether activities fall within the "business of banking" under 12 USC §24(7): 1) whether the activity is the functional equivalent to or a logical outgrowth of a recognized business activity; 2) whether the activity benefits bank customers or is convenient or useful to banks; and 3) whether the activity presents risks of a type similar to those already assumed by banks. See NationsBank v. Variable Annuity Life Insurance Co., 115 S.Ct. 810, at 811-12 (1995). We have previously found the following activities, among others, to be incidental to the business of banking and permissible for state banks: providing free prepaid phone long distance telephone cards to bank customers (fee from service provider); selling excess data capacity to affiliated banks; selling excess Internet access to bank customers; providing payroll services for customers; and providing consulting services for other depository institutions. However, the Bank's direct sale of prepaid phone cards for profit does not meet the requirements of the "business of banking" test.

We believe that the OCC would likely reach the same conclusion. The Bank has indicated that OCC Interpretative Letter #718 (April 1996) authorizes national banks to sell prepaid phone cards. This interpretative letter opined that under 12 USC §24(7), national banks could dispense "alternate media," including prepaid phone cards, through the use of automated teller machines (ATMs) located at their branches. However, the OCC's letter did not give national bank's blanket authority to directly sell, for profit, prepaid phone cards. The OCC's letter determined the following: 1) the dispensing of prepaid phone cards through an ATM represents the cardholder's prepayment for a merchant's goods or services; 2) the transferring of funds from the customer's account to the merchant's account is a fundamental part of banking; 3) because the transaction will not be consummated until the cardholder uses the media to obtain the merchant's good and services, banks are not selling the merchant's products or services by dispensing the "alternate media"; and 4) banks are providing a convenience to their customers, in connection with the performance of a core banking activity of transferring funds between a customer and merchants' accounts. Clearly, the Bank's proposed activity involving its direct sale of its own inventory of prepaid phone cards for profit does not meet the foregoing requirements. Therefore, parity under §3.010 of the Act [now Finance Code §32.009(a)] is not implicated as to the Bank's proposed activity involving its direct sale of prepaid phone cards for profit.

Additionally, §5.107 of the Act [now Finance Code §34.107] prohibits a state bank from investing funds in trade or commerce by selling or otherwise dealing in goods or owning or operating a business not part of the business of banking. The Bank's proposed activity of directly selling the prepaid phone cards to its customer violates [Finance Code §34.107] and is not permissible.

Merchant's Sale of Prepaid Phone Cards On Bank's Premises

Under the Bank's second proposed activity, its customer, the Merchant, would sell the prepaid phone cards on the Bank's premises for approximately one month. The Bank would not receive any compensation from the sale of the prepaid phone cards or for the use of its premises.

The Bank's proposed activity does not entail the Bank owning or operating a business not part of the business of banking or engaging in commerce, which is prohibited by [Finance Code §34.107], and is permissible under the general bank powers' provisions of [Finance Code §32.001(b)(1)]. Therefore, the Bank is empowered to allow the Merchant to sell the commemorative prepaid phone cards on its premises, provided the following conditions are met:

(1)  The Bank must ensure that the customer is appropriately informed that he or she is dealing with the Merchant as far as the telephone services are concerned;

(2)  The Bank must obtain an agreement from the Merchant to hold the Bank harmless for any problems which may arise with the prepaid phone cards or the Merchant's servicing efforts; and

(3)  The Bank must obtain assurance from the Merchant that it has obtained all the requisite federal and state regulatory clearances (e.g., from the Federal Communications Commission, the Texas Public Utilities Commission, etc.).

Bank's Sale of Prepaid Phone Cards As Agent For Its Customer

While you have not asked the question directly, we also find that the Bank can, if it desires, sell the commemorative prepaid phone cards as an agent for its customer, the Merchant.  Under, §3.001(a)(2) [now Finance Code §32.001(b)(2)], a state bank may act as an agent. Further, this activity does not entail the Bank owning or operating a business not part of the business of banking or engaging in commerce, which is prohibited by [Finance Code §34.107]. Therefore, it is permissible for the Bank to disperse the prepaid phone cards on its premises, to collect the proceeds from the sale, remit these proceeds to its customer, the Merchant, and receive a fee for its services from the Merchant.

We note that under 12 USC 24(7), national banks are also authorized to sell certain items as agents for its customers. For example, national banks are permitted to act as agents for customers for the purpose of collecting prepaid tolls from toll road patrons who obtain the tags and set up special accounts at the bank. See OCC Interpretative Letter #731 (July 1, 1996). National banks have also been allowed to act as agents for states in selling and renewing license plates and license tags, with the fee income being remitted to the bank. See Corbett v. Devon Bank, 299 N.E. 2d 521, 529 (Ill. App. Ct. 1988); and OCC Interpretative Letter from Stephen B. Brown, Attorney (Dec. 13, 1989) (unpublished). Additionally, national banks have also been allowed to disperse food stamps and government welfare checks. See Philadelphia Check Cashiers Association v. Heimann, No. 79-1318 (D. Pa. March 12, 1980) (unpublished decision). Finally, national banks have been allowed to disperse, on behalf of their customers, theater tickets and amusement tickets. See Vogel v. Saenger Theatres, Inc., 22 So. 2d 189, 192 (La. 1945) and Greenfield v. Maryland Jockey Club of Baltimore, 57 A.2d 335, 336-37 (Md. 1948). In these cases, the courts and the OCC have determined that the performance of collection and remittance activities by a national bank, as agents for its customers, including the sale of prepaid phone cards, are part of the business of banking and serve as a public convenience. See also OCC Interpretative Letter #718 (April 1996).

Finally, this opinion is limited to the facts and circumstances set forth in your letter dated January 21, 1997, and subsequent telephone conversations between you and my office. Any change in those facts, circumstances, or the parties to the transaction may result in a different opinion. Please call me if you have any questions or comments.

Opinion No. 97-02

Separate loans to spouses must be aggregated for legal lending limit purposes unless the loan files fully document separate sources of repayment.

April 1, 1997

Jerry G. Sanchez, Assistant General Counsel

This letter is in response to your letter dated December 30, 1996, addressed to Everette Jobe, General Counsel. You requested an opinion as to whether separate loans to you and your spouse at [*****] (the "Bank") must be aggregated for legal lending limit purposes.

You are a director of the Bank. You have two individual loans at the Bank and your spouse has three individual loans at the Bank. Both you and your spouse have one joint loan at the Bank. You have represented that both you and your spouse own separate and community property. You have also represented that both you and your spouse maintain separate bank accounts. You have also represented that each spouse services their own individual indebtedness.

Under Tex. Rev. Civ. Stat. Ann. art. 342-5.201(a) (the "Act") [now Finance Code §34.201(a)], the total loans and extensions of credit by a state bank outstanding at any one time to a person may not exceed 25% of the bank's capital and certified surplus.1 The term "loans and extensions of credit" is defined in the Act, §1.002(a)(34) [now Finance Code §31.002(a)(34)], as "...direct or indirect advances of funds by a state bank to a person that are conditioned on the obligation of the person to repay the funds or that are repayable from specific property pledged by or on behalf of the person." The term "person" is defined in the Act, §1.002(44) [now Government Code §311.005(2)], as "... an individual or any legal entity."

Under 7 TAC §12.9(a)(3), a loan or extension of credit to one borrower is attributed to another person, and each person will be considered a borrower if the expected source of repayment for each loan or extension of credit is the same for each person. 7 TAC §12.9(d) provides that the expected source of repayment for each loan or extension of credit is considered the same if the primary source of repayment is the same for each borrower.

Under Tex. Fam. Code Ann. §5.21 [now Family Code §3.101]2, each spouse has the sole management, control, and disposition of his or her separate property. Under Tex. Fam. Code Ann. §5.01(a) [now Family Code §3.001], a spouse's separate property consists of: (1) the property owned or claimed by the spouse before marriage; (2) the property acquired by the spouse during marriage by gift, devise, or descent; and (3) personal injury recoveries sustained by the spouse during the marriage, except any recovery for loss of earning capacity during the marriage.

Under Tex. Fam. Code Ann. §5.01(b) [now Family Code §3.002], community property consists of the property, other than separate property, acquired by a spouse during marriage. Under Tex. Fam. Code Ann. §5.02 [now Family Code §3.003], property possessed by either spouse during marriage is presumed to be community property. If the assets belong to the community, a complex set of rules govern the managerial powers of each spouse, depending on whether the property is either spouse's sole management community property or joint community property. Tex. Fam. Code Ann. §5.22(a) [now Family Code §3.102(a)] provides that each spouse has the sole management, control, and disposition of the community property that he or she would have owned if single, including but not limited to: (1) personal earnings; (2) revenue from separate property; (3) recoveries for personal injuries; and (4) the increase and mutations of, and the revenue from, all property subject to his or her sole management, control, and disposition. Tex. Fam. Code Ann. §5.22(b) [now Family Code §3.102(b)] provides that if community property subject to the sole management, control, and disposition of one spouse is mixed or combined with the community property subject to the sole management, control, and disposition of the other spouse, then the mixed or combined community property is subject to the joint management, control, and disposition of the spouses, unless the spouses provide otherwise by power of attorney or other agreement in writing.

Theoretically, it is possible for you and your spouse to service each's individual indebtedness entirely from personal earnings and revenue earned from each individual's separate property or sole management community property, thus avoiding aggregation of each individual's indebtedness. However, unless each loan file is fully documented to reflect that the expected source of repayment is not the same, the loans will be aggregated. This documentation should include the following:

(1) sworn financial statements which clearly reflect whether assets and liabilities are separate or community property, including individual cash flow statements reflecting the separate or community property income and expenses;

(2) If a spouse claims property to be subject to his or her sole management, control, and disposition: a power of attorney; muniment of title; contract; deposit of funds; or other written agreement or evidence of ownership (Tex. Fam. Code Ann. §§5.22(c), 5.24(a) [now §§3.102(c), 3.104(a)]); and

(3) If a spouse claims property to be his or her separate property: a subscribed and acknowledged schedule of the spouse's separate property recorded in the deed records of the county in which the parties, or one of them, reside and in the county or counties in which the real property is located (Tex. Fam. Code Ann. §5.03 [now §3.004]).

If you and your spouse are servicing all or some of your individual indebtedness from revenue earned from your joint community property, then your individual indebtedness will be aggregated. This is because you and your spouse are the expected source of repayment of each other's individual indebtedness. Joint loans will also be aggregated with each spouse's individual indebtedness because both you and your spouse are the expected source of repayment. I have assumed for purposes of this opinion that the loans to you and your spouse do not meet the "direct benefit" test of 7 TAC §12.9(a)(1), (b), or the "common enterprise" test of 7 TAC §12.9(a)(2), (c).

Additionally, please be advised that loans to directors or such person's related interests are governed by Reg O (12 CFR Part 215), applicable with limited exceptions to nonmember banks by virtue of 12 USC §1828(j)(2) and 12 CFR §337.3. For example, 12 USC §375b(5) provides that loans to an executive officer, director, or principal shareholder, or to any related interest of such a person, when aggregated with the amount of all outstanding loans by a bank to its executive officers, directors, principal shareholders, and those person's related interests must not exceed the bank's unimpaired capital and unimpaired surplus. These loans must be approved in advance by a majority of the disinterested members of the board of directors if the aggregate amount of loans to such person and such person's related interests would exceed $500,000, or exceed the higher of $25,000 or five percent of the bank's unimpaired capital and unimpaired surplus. Related interest of a person is defined in 12 USC §375b(9)(G)(1) and 12 CFR §215.2(n) as a company that is controlled by that person. Also, under 12 CFR §215.4(a), a bank may not make an extension of credit to a director unless it is made on substantially the same terms as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank; and does not involve more than the normal risk of repayment or present other unfavorable features.  

Banks are cautioned that the purpose of the lending limit is to reduce risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of the state bank's funds. Thus, these types of loans will be closely scrutinized by an examiner.

Finally, this opinion is limited to the facts and circumstances set forth in your letter dated December 30, 1996, and a subsequent telephone conversation between you and my office. Any change in those facts, circumstances, or the parties to the transaction may result in a different opinion. Please call me if you have any questions or comments.

Opinion No. 96-49

A foreign bank agency may issue guarantees for obligations of customers under an umbrella credit facility.

March 5, 1997

Sammie K. Glasco, Assistant General Counsel

By letter dated December 2, 1996, and supplemented on December 30, 1996, you have requested an opinion regarding whether, under limited circumstances, [*****] (the "Bank"), acting through its licensed, Houston, Texas, agency office (the [*****]) may issue guarantees in favor of foreign country subsidiaries ("[*****] Subsidiaries") of the Bank. The facts are as follows:

The [*****] Agency is a foreign bank agency of the Bank licensed in the State of Texas. The [*****] Agency seeks authorization to issue guarantees in connection with credit extended to its customers who have worldwide borrowing needs, designated by the Bank as "global customers." The [*****] Agency would offer an umbrella credit facility ("umbrella facility") to the global customers. This umbrella facility would, among other functions, establish the maximum amount of credit available to a global customer at the Bank or at any [*****] Subsidiary. A global customer would receive funds from the umbrella facility by either direct borrowing or lines of credit. The [*****] Agency would maintain the primary credit relationship, process the application, and obtain the necessary credit approval for each global customer. In addition, the Houston Agency would be the primary party on the loan documents setting forth the reimbursement obligations of the global customer. The [*****] Agency would then issue the guarantees in favor of [*****] Subsidiaries making loans under the umbrella facility, thereby assuming the credit risk for the entire umbrella facility.

We understand that it has been the Bank's past policy to require the [*****] branch (and similar branches) to issue letters of credit to the [*****] Subsidiaries. However, according to correspondence attached to your request,1 the practice of issuing letters of credit has become increasingly burdensome to global customers. These customers are reluctant "after having initially negotiated loan documentation related to the umbrella facility, to negotiate additional letter of credit documents, including an application and reimbursement agreement, each time a borrowing" is requested of an [*****] Subsidiary. The Bank believes it would be better able to accommodate global customers if its agencies, such as the [*****] Agency, were authorized to issue direct guarantees to the [*****] Subsidiaries for its credit customers.

Finally, you note that the income of the [*****] Agency, an office of the Bank, is reported as a part of the Bank's income. In addition, the [*****] Subsidiaries are 100% held subsidiaries of the Bank, and thus report income on a consolidated basis with that of the Bank.

Foreign bank agencies are authorized under Chapter 9, Tex. Rev. Civ. Stat. Ann., arts. 342-1.001 et seq., Texas Banking Act (the "Act") [now Chapter 204, Finance Code]. Section 9.012 of the Act [now Finance Code §204.105(a)] provides that a foreign bank corporation licensed to transact business in this state through a foreign bank agency may generally exercise the powers of a state bank. There is no express provision in the [Finance Code] that grants state banks the power to guarantee obligations of others. However, this Department has, by regulation, recognized a limited power of state banks to issue guarantees; 7 TAC §11.83(b) provides that a state bank "may lend its credit, binds itself as a surety to identify another, or otherwise become a guarantor, if it has a substantial interest in the performance of transaction involved or has a segregated deposit sufficient amount to cover the bank's total potential liability."

There is no indication from your correspondence that the [*****] Agency or the Bank has segregated deposits. Therefore, we must analyze the transaction under the "substantial interest" test. A bank has a substantial interest in activities validly incidental to authorized bank activities, such as lending. The guarantees in question are related to the lending activities of the [*****] Agency, which is an office of the Bank. The [*****] Subsidiaries, although separate corporate entities, are wholly owned by the Bank. The profit and loss on the books of the [*****] Subsidiaries is reported on a fully consolidated basis in the Bank's financial statements. Thus, in effect, the credit risk of the [*****] Agency and the Bank is not altered. Based on the above, we are of the opinion that the Bank, acting through its [*****] Agency has a substantial interest in the transactions you have detailed and may issue guarantees to the [*****] Subsidiaries.

We note that the Office of the Comptroller of the Currency ( the "OCC") has reached a similar result in analyzing analogous federal law [See OCC Interpretative Letter No. 542, dated February 6, 1991 ("Letter 542")]. The OCC allows national banks to issue guarantees under limited circumstances.2  In Letter 542, the OCC did not object to a proposal by a national bank to guarantee repayment of a non-affiliated third party's loan from the bank's Canadian subsidiary. The OCC found that the issue of whether a national bank has a substantial interest sufficient to issue guarantees turns ultimately on whether the guarantee is validly incidental to another authorized activity of the bank involved in the transaction. The OCC also noted that the transaction did not alter the bank's position regarding credit risk, since the bank and the foreign bank subsidiary were affiliates.

In summary, the Bank may issue guarantees in favor of wholly owned [*****] Subsidiaries of the Bank through the [*****] Agency. Our conclusions should not be construed as an endorsement of the advisability of issuing these guarantees, determinations that the Bank's board of directors must make based on appropriate information and considerations.

This opinion is limited to and based solely on the facts and circumstances set forth in your letter of December 2, 1996 and supplemental materials provided on December 30, 1996. Any changes in the facts and circumstances surrounding the proposed transaction could result in a change of this opinion.

Opinion No. 96-47

Securities investment limits are calculated on par value, not market value.

February 5, 1997

Jerry G. Sanchez, Assistant General Counsel

This letter is in response to your letter dated December 10, 1996. You requested an opinion as to whether the purchase of a portfolio of securities investments, legal when made, violates the investment limitations when its market appreciation subsequently causes it to exceed its investment limitations.

Tex. Rev. Civ. Stat. Ann. arts. 342-5.101 et seq. (the "Act") [now Finance Code §§34.101 et seq.], provides the applicable limitations for investments in securities. The Act is made applicable to state trust companies by Tex. Rev. Civ. Stat. art 342-1102.1 A rule recently adopted to partially address your concerns, 7 TAC §12.61(b),2 prohibits the making of a securities investment on or after September 1, 1995, that is not in compliance with law or that would cause investments made prior to September 1, 1995, which are not in compliance with the Act's applicable investment limitations, to become further out of compliance.

The purpose of the investment limitations is to protect the safety and soundness of state-chartered financial institutions by preventing investments in the securities of a single maker or obligor or a relatively small group of such persons who are financially interdependent, and to promote diversification of investments in order to reduce risks. Securities investment limitations are calculated based on par value. Thus, if securities investments conform with the applicable investment limitations (based on par value), subsequent market appreciation of those investments will not cause it to be in violation of its investment limitations.

This opinion is limited to the facts and circumstances set forth in your letter, dated December 10, 1996, and a subsequent telephone conversation between you and my office. Any change in those facts or circumstances may result in a different opinion.

Opinion No. 96-42

Loans made to the same individual by two separate banks, which complied with the lending limits of the two banks at the time of funding but now exceed the lending limit of the merged banks, are considered nonconforming and not a violation, and will be cited in examination reports as nonconforming until the balance is brought under the new lending limit.

November 12, 1997

Sammie K. Glasco, Assistant General Counsel

This letter is in response to your letter of October 29, 1996 and our conversation of January 16, 1997. Your question involves whether Texas legal lending statutes and regulations were violated as a result of the merger of [Bank A] into [Bank B]. Prior to the merger, the president of [Bank B] had loans with both [Bank A] and [Bank B]. The merger caused the aggregate loans of the president to exceed the legal lending limit of [Bank B], even though the loans were within legal lending limits when made by the individual institutions.

Texas legal lending statutes and regulations do not specifically address the question you have presented. 7 TAC §12.10 does address the effect of a merger on borrowers. Section 12.10(a)(2) provides that the legal lending limit is not violated if a loan no longer complies with the bank's lending limit because borrowers have merged or become affiliated in such a way to invoke aggregation of the loans. Such loans are considered nonconforming. It is the policy of this Department to also afford such treatment to loans that no longer comply with legal lending limits solely because of the merger of banks. Therefore, it is our opinion that the transaction you have described in which loans were within the legal lending limits of the individual banks when made, but no longer comply solely as a result of a merger, are not a violation of Texas legal lending statutes and regulations, but rather are considered nonconforming loans.

7 TAC §12.10(b) provides that " a bank must exercise reasonable efforts to bring a loan or extension of credit that is nonconforming ... into conformity with the legal lending limit, consistent with safe and sound banking practices." This means that the loans will be cited on any examination of [Bank B] by the Department, until brought into conformity. In addition, during any examination of [Bank B], Departmental bank examiners may seek evidence of actions taken to bring the loans into conformity.  A copy of the current regulations concerning legal lending limits, 7 TAC §§12.1-12.11, is attached for your reference.

In addition, this Department's regulations permit, as a last resort, the renewal or restructuring of an existing, nonconforming loan unless additional funds are advanced by the bank to the borrower, the original borrower is replaced by a new borrower or the banking commissioner determines that the renewal or restructuring was designed to evade the bank's legal lending limit [7 TAC §12.10(b)]. It is suggested that [Bank B] contact this Department prior to renewing or restructuring the loans in question if this is deemed essential for some reason.

The loans in question, also, raise issues under federal provisions imposing limitations on extensions of credit by Regulation O (12 CFR Part 215), applicable with limited exceptions to nonmember banks by virtue of 12 USC §1828(j)(2) and 12 CFR §337.3. Generally member (and nonmember) banks of the Federal Reserve System may not extend credit to any insider of the bank, unless certain conditions are followed [12 CFR §215.4(a)]. An insider includes an executive officer of a bank [12 CFR§215.2(h)]. However, §215.3 provides that an extension of credit does not include a "merger or consolidation of banks or a similar transaction by which a bank acquires the assets and assumes the liabilities of another bank or similar organization." This Department cannot authoritatively interpret the cited provisions. It is suggested that you contact the Federal Reserve Bank in Dallas for an opinion regarding the above federal provisions.

This opinion is limited to the facts and circumstances stated in your letter of October 29, 1996, and telephone conversation of January 16, 1997. Any change in those facts or circumstances could result in a different conclusion.

Opinion No. 96-31

A state bank may make a non-controlling minority investment in another entity under certain conditions.

September 24, 1996

Jerry G. Sanchez, Assistant General Counsel

Commissioner Ghiglieri has requested that I respond to your letter dated August 13, 1996, regarding your client's desire to make a minority investment in an entity in which it will have a 44 percent voting interest and a 40 percent equity interest. As a matter of parity pursuant to the Texas Banking Act ("Act"), §3.010 [now Finance Code §32.009], we have concluded that a state bank may make a direct equity investment into an entity in which it will own less than a 50 percent interest, and the locations at which that entity will conduct business are not subject to branching restrictions as further described and limited by this letter, notwithstanding the provisions of the Act, §5.103 [now Finance Code §34.103].

[Finance Code §34.103] clearly provides the authority for a state bank to invest in an operating subsidiary that conducts activities authorized for a state bank or bank holding company. The statute further permits a state bank to make a minority investment indirectly through an operating subsidiary in certain types of entities. A "minority interest" has been interpreted to mean 50 percent or less. However, the statute does not provide the authority to make a direct investment of this type.

According to your letter, the Bank currently has not been active in the mortgage business. The Bank has been presented with an opportunity to make a minority investment in [*****] Holding Company ("Holding Company") and thereby engage in residential mortgage lending activities through Holding Company's wholly-owned subsidiary, [*****] Mortgage Company ("Mortgage"). Holding Company's only activity is holding the stock of Mortgage. Mortgage's only activity is the origination of single family mortgage loans.

You represent that the Bank has concluded that it would be desirable to offer mortgage origination services through an entity in which the Bank would have a significant role but would not be the sole shareholder. The proposal contemplates that the Bank will hold approximately 40 percent of the outstanding shares of Holding Company, and 44 percent of the voting stock of Holding Company.

The Bank and all other investors who own voting stock of Holding Company propose to enter into an Operating Agreement that includes the following provisions:

1.   Neither Holding Company nor Mortgage will conduct any line of business or engage in any material transaction or series of transactions other than the origination and servicing of residential mortgage loan and other matters incidental to that activity;

2.   Holding Company and Mortgage will submit themselves to the extent legally required to the examination authority of the Texas Department of Banking ("TDB");

3.   Holding Company's board of directors will have five members, including two directors designated by the Bank, two designated as the two outside investors owning voting stock and one, who will be selected by the two outside investors. The Bank will continue to have the right to designate two members of the Board as long as the 5,000 outstanding shares of class-B non-voting, cumulative preferred stock have not been redeemed by Holding Company through a simple majority vote of its Board;

4.   Supermajority voting provisions will afford the Bank an effective veto power over certain major corporate actions, including any proposal that Holding Company or Mortgage enter into any line of business other than holding the shares of Mortgage and conduct any line of business or engage in any material transaction or series of transactions other than the origination and servicing of residential mortgage loans and other matters incidental to that activity. Under the supermajority provision, the approval of four of the five directors is required; and

5.   The bylaws of Holding Company and Mortgage will be amended to provide that, in the event that Holding Company or Mortgage, with the necessary concurrence of at least four of the five directors of Holding Company, should determine to conduct any line of business or engage in any material transaction or series of transactions other than the origination and servicing of residential mortgage loans and other matters incidental to that activity, the Bank shall, within 180 days after such determination but in any event prior to the commencement of said transaction(s), either (a) obtain any requisite regulatory approval, including any requisite notices to or approvals or waivers from the TDB, or (b) divest itself of ownership of its shares in Holding Company.

Analysis

A.  Incidental Powers (Act, §3.001(1) [now Finance Code §32.001(b)(1)])

The OCC has permitted national banks to own minority interests stock in subsidiary corporations. Recent OCC interpretive letters extensively analyzed the authority of national banks under 12 USC 24(Seventh) to own stock, and reviewed OCC precedents on the ownership of stock in amounts less than that required for an operating subsidiary, See Interpretive Letters No. 697, 711, 731 and 732 as well as Conditional Approvals 194 and 202. Those documents concluded that such ownership is permissible provided that four standards, drawn from OCC precedents, are satisfied. They are:

1.   The activities of the enterprise in which the investment is made must be limited to activities that are part of, or incidental to, the business of banking;

2.   The bank must be able to prevent the enterprise from engaging in activities that do not meet the foregoing standard, or be able to withdraw its investment;

3.   The bank's loss exposure must be limited, as a legal and accounting matter, and the bank must not have open-ended liability for the obligations of the enterprise; and

4.   The investment must be convenient or useful to the bank in carrying out its business and not a mere passive-investment unrelated to that bank's banking business.

As a matter of parity with national banks pursuant to [Finance Code §32.009], we are of the opinion that the Bank may make a direct investment in an entity in which the Bank will have a minority interest. Each of the above four standards are discussed below, and applied to your proposal.

1.  The activities of the enterprise in which the investment is made must be limited to activities that are part of, or incidental to, the business of banking, under [Finance Code §32.001(b)(1)].

It is clear that mortgage banking activities are permissible for state banks. Therefore, this standard is satisfied.

2.  The bank must be able to prevent the enterprise from engaging in activities that do not meet the foregoing standard, or be able to withdraw its investment.

The activities of an enterprise in which a state bank invests must be part of or incidental to the business or banking not only at the time the bank initially purchases stock, but they must remain so for as long as the bank has an ownership interest. However, minority shareholders in a corporation do not possess a veto power as a matter of corporate law. One way to address this problem is for the corporation's articles of incorporation or bylaws to limit its activities to those that are permissible for state banks. In this instance, the bylaws of Holding Company and Mortgage are being amended to restrict the activities of those entities.

Contractual solutions are also feasible. In the present case, the Bank and all other investor groups have entered into an Operating Agreement to address this concern. The Agreement provides that neither the Holding Company nor any of its subsidiaries (e.g., Mortgage) will conduct any business or engage in any material transaction or series of transactions other than the origination and servicing of residential mortgage loans and other matters incidental to that activity. In addition, as described above, board of directors supermajority voting provisions will give the Bank a veto power over certain major corporate actions, as long as the Bank's 5,000 outstanding shares of Class B non-voting, cumulative preferred stock have not been redeemed by Holding Company. Without more, this would be insufficient; however, the operating agreement provides that in the event that Holding Company or Mortgage should determine to conduct or engage in any line of business or engage in any material transaction(s) other than the origination and servicing of residential mortgage loans and other matters incidental to that activity, the Bank shall either obtain any requisite regulatory approvals, including the TDB, or divest itself of ownership of its shares in Holding Company. These provisions assure that neither Holding Company nor Mortgage will engage in any activity that is not permissible for a corporation having a Texas bank shareholder.

3.  The bank's loss exposure must be limited, as a legal and accounting matter, and the bank must not have open-ended liability for the obligations of the enterprise.

A primary concern of the OCC and this Department is that banks should not be subjected to undue risk. Where an investing bank will not control the operations of the entity in which the bank holds an interest, it is important that a bank's investment not expose it to unlimited liability. Normally, this is not a concern when investing in a corporation, for shareholders are protected by the "corporate veil" from liability for the debts of the corporation.

In the present case, both Holding Company and Mortgage will be separate corporations, with their own capital, directors, and officers. You represent that corporate formalities will be properly observed so as to minimize the possibility that the Bank could be subjected to liability for the obligations of those entities. Since all operations will be conducted by Mortgage, or at the second tier level, the Bank will have an extra layer of protection.

Further, you have informed us that the Bank has been advised by its independent accountants that the appropriate accounting treatment for its investment in Holding Company will be to report it as an unconsolidated subsidiary under the equity method of accounting. Under this method, which is used for equity interests of 20 to 50 percent in corporations, losses recognized by the investor will not exceed the amount of the investment (including extensions of credit or guarantees, if any) shown on the investor's books. See generally, Accounting Principles Board, Op. 18, 19 (1971) (equity method of accounting for investments in common stock).

Therefore, for both legal and accounting purposes, the Bank's potential loss exposure should be limited to the amount of its investment (plus, potentially, the amount of any extensions of credit that remain outstanding). Based on your representation that this exposure will be quantifiable and controllable, this standard is satisfied.

4.  The investment must be convenient or useful to the bank in carrying out its business and not a mere passive investment unrelated to that bank's banking business.

[Finance Code §32.001(b)(1)], gives state banks incidental powers that are "necessary" to carry on the business of banking as provided by the [Finance Code]. "Necessary" has been judicially construed to mean "convenient or useful." Arnold Tours, Inc. v. Camp, 472 F.2d 427, 432 (1st Cir. 1972). While the Act, §5.101 [now Finance Code §34.101], generally prohibits state banks from investing in equity securities, its intent is to prevent speculation. The Act, §5.103(d)(2) [now Finance Code §34.103(d)], allows a  state bank to make a minority investment directly through an operating subsidiary in equity securities of a company that engages solely in an activity that is permissible for a bank service corporation or a bank holding company subsidiary. National banks are permitted to directly own a minority interest in stock of subsidiary corporations under 12 USC 24 (Seventh). Thus, as a matter of parity pursuant to the Act, §3.010 [now Finance Code §32.009], a state bank may make a direct equity investment into an entity in which it will own less than a 50 percent interest.

The Bank wishes to reduce the resources that it must commit to providing capital and funding for Mortgage. The proposed investment will make that possible while retaining for the Bank the ability to offer a ready source of mortgage lending to customers and prospective customers of the Bank. As of March 31, 1996, Mortgage had approximately $50.5 million in total assets, $41.8 million of which was in first mortgage real estate loans held for sale. Total liabilities equaled $44.7 million and capital totaled $5.8 million. Net income for the first 3 months of 1996 totaled $371.8 million. During 1995, personnel and administrative expenses for Mortgage totaled in excess of $4.5 million, more than double the Bank's proposed investment in Holding Company.

The transaction will not result in a mere passive investment, for the Bank will continue to play an active part in the venture. With the exception of a small number of shares owned by officers and employees, there will be only two other shareholders in addition to the Bank. This, in itself, suggests that it will not be a passive investment. The Bank will hold two seats on the board of directors.

The TDB focuses its examination efforts on the levels of risk in the state banks that it supervises. By reducing its current financial commitment to Mortgage, the Bank will be able to diversify its use of funds and thereby reduce its level of risk. These factors demonstrate that the Bank's investment in Holding Company will provide a benefit that is convenient or useful to the Bank in carrying out its banking businesses, and the fourth standard is therefore satisfied.

B.  Other Issues

1.  Branching

The Bank's proposal also raises the issue of whether loans made by Mortgage should be attributed to the Bank, and locations of Mortgage treated as the Bank's locations, for purposes of applying branching restrictions.

The operations of a subsidiary are not attributed to a state bank for branching purposes merely because the bank conducts some of its core banking business through that subsidiary. State banks frequently use affiliates, third parties, or instrumentalities controlled by third parties, to facilitate their banking business, yet these entities are not considered to be branches of the bank. Also, state banks often own and operate subsidiaries. We conclude that the locations of Mortgage will not be treated as the Bank's locations for purposes of applying branching restrictions. See Attorney General Opinion H-1292 (1978); Brenham Production Credit Ass'n v. Zeiss, 264 S.W. 2d 95 (Tex. 1953); and, Independent Bankers Association of New York v. Marine Midland Bank, 757 F.2d 453 (2d Cir. 1985), cert. denied, 476 U.S. 1186 (1986). 

2.  Extensions of Credit

Sections 23A and 23B of the Federal Reserve Act, 12 USC 371c and 371c-1, place restrictions on extensions of credit and other transactions between member banks and their affiliates, but these restrictions will not apply to extensions of credit from the Bank to Holding Company or Mortgage after the restructuring. The Bank's ownership of Holding Company will qualify it and Mortgage as subsidiaries of the Bank for purposes of section 23A. With respect to a specified company, a "subsidiary" is a company that is controlled by the specified company, 12 USC 371c(b)(4); and a company is deemed to control another company if it has the power to vote 25 percent or more of any class of voting securities of that company, 12 USC 371c(b)(3)(A)(i). Since the statute excludes nonbank subsidiaries of member banks from the definition of "affiliate," 12 USC 371c(b)(2)(A), nonbank subsidiaries are not subject to the restrictions on transactions with affiliates. Section 23B incorporates the same definition of "affiliate." 12 USC 371c-1(d)(1).

In the event that Holding Company or Mortgage receive any loans from the Bank in the future, they will be treated as entities distinct from the Bank, and they will be subject to the lending limit rules established by the Act, §§5.201 et seq. [now Finance Code §§34.201 et seq.], as any other borrower unrelated to the Bank. The Act, §5.201(a)(13) [now Finance Code §34.201(a)(13)], exempts the indebtedness of an affiliate of a bank from the general 25 percent loan limitation if the transaction is subject to 12 USC §371c; however, this exemption will not be applicable to loans from the Bank to Mortgage. Also, the Act, §5.201(a)(14) [now Finance Code §34.201(a)(14)], exempts the indebtedness of an operating subsidiary of the bank from the general 25 percent loan limitation; however, this exemption will not be applicable to any loans from the Bank to Mortgage. Therefore, Holding Company and Mortgage will be subject to the lending limits established by [Finance Code §§34.201 et seq.].

3.  Examination

Under the Act, §2.008 [now Finance Code §31.107], TDB requires that entities in which state banks invest be subject to TDB examination. The Operating Agreement to be entered into by the Bank and the other proposed investors in Holding Company provides that Holding Company and its subsidiaries will submit themselves to the examination authority of TDB. Accordingly, the Bank is prepared to proceed with this investment subject to the condition that Holding Company and Mortgage will be subject to periodic examination by the TDB. Furthermore, the Bank agrees that this condition is mandatory in order to obtain the TDB's approval of its application to acquire a 40% equity interest in Holding Company.

Conclusion

For the reasons outlined above, it is our conclusion that the Bank may legally hold a 40 percent equity interest in Holding Company, pursuant to the transaction proposed in your letter. We also conclude that branching restrictions will not apply to Mortgage.

Our conclusion is conditioned upon compliance with the commitments made in your letter of inquiry and with the conditions listed below:

1.   Holding Company and Mortgage's activities will be restricted to the origination and servicing of residential mortgage loans and other matters incidental to that activity;

2.   the Bank will have veto power over any activities and major decisions of Holding Company and Mortgage that are inconsistent with condition number one, or the Bank will withdraw its investment from Holding Company if it or Mortgage proposes to engage in an activity that is inconsistent with condition number one;

3.   in the event that Holding Company or Mortgage, with the necessary concurrence of at least four of the five directors of Holding Company, should determine to conduct or engage in any line of business or engage in any material transaction or series of transactions other than the origination and servicing of residential mortgage loans and other matters incidental to that activity, the Bank shall, within 180 days after such determination but in any event prior to the commencement of such activity, either obtain any requisite regulatory approvals, including notices to or approvals or waivers from the TDB, or divest itself of ownership of its shares in Holding Company;

4.   Holding Company and Mortgage will be subject to TDB supervision and examination; and

5.   the Bank will not account for its investment in Holding Company under the consolidated method of accounting.

These commitments and conditions are conditions imposed in writing by the TDB in connection with its action on the request for a legal opinion confirming that the proposed investment is permissible under [Finance Code §34.103] and, as such, may be enforced under applicable law.

Opinion No. 96-27

A state bank may make an unsecured loan to its employee stock ownership plan under certain conditions.

September 27, 1996

Jerry G. Sanchez, Assistant General Counsel

Your letter of July 15, 1996, to Larry Hearn, has been referred to me for response. You have asked whether [Bank A], may make an unsecured loan to its Employee Stock Ownership Plan (the "ESOP") which would be fully offset by previously booked liability. Pursuant to prior approval obtained from the Texas Department of Banking (the "Department"), [Bank A] currently guarantees the repayment of principal and interest of a loan made to the ESOP by [Bank B]. The bank stock held by the ESOP is not used as collateral for the [Bank B] loan. Also, [Bank A] has reduced its capital in the amount of this contingent liability. You have represented that the trustee of the ESOP is an executive officer of [Bank A].

[Bank A] proposes to make an unsecured loan to the ESOP for the purpose of retiring the ESOP's indebtedness to [Bank B]. We conclude that [Bank A] may do so if it carefully considers safety and soundness issues in making the proposed unsecured loan, subject to limitations regarding loans to affiliates under 12 USC §371c, and loans to executive officers, directors, or principal shareholders under 12 USC §375b, to the extent applicable. 

First, so long as [Bank A's] proposed loan to the ESOP is unsecured, [Bank A] would not be at risk of violating the general prohibition against a state bank acquiring a lien or title to its own shares or participation shares under §5.102 of the Texas Banking Act [now Finance Code §34.102]. However, an unsecured loan must be a good loan and must not constitute an unsafe or unsound banking practice. Whether [Bank A's] proposed loan to the ESOP will constitute an unsafe or unsound banking practice will be based on an analysis of the size of the loan as measured against the size and condition of [Bank A].

Second, the proposed loan to the ESOP may be includible within loans to the trustee for purposes of the limitations on extensions of credit imposed by Reg O (12 CFR Part 215), applicable with limited exceptions to nonmember banks by virtue of 12 USC §1828(j)(2) and 12 CFR §337.3. For example, 12 USC §375b(5) provides that loans to an executive officer, director, or principal shareholder, or to any related interest of such a person, when aggregated with the amount of all outstanding loans by a bank to its executive officers, directors, principal shareholders, and those persons' related interests must not exceed the bank's unimpaired capital and unimpaired surplus.  Under 12 CFR §215.4(b) and §337.3(b), a loan to a person subject to Reg O or such person's related interests must be approved in advance by a majority of the disinterested members of the board of directors if the aggregate amount of loans to such person and such person's related interests, including the proposed ESOP loan, would exceed $500,000, or exceed the higher of $25,000 or five percent of the bank's unimpaired capital and unimpaired surplus. Related interest of a person is defined in 12 USC §375b(9)(G)(1) and 12 CFR §215.2(n) as a company that is controlled by that person. Thus, because the trustee controls the ESOP, the ESOP is a related interest of the trustee, and the trustee is an executive officer of [Bank A], the proposed loan to the ESOP may be included within loans to the trustee for purposes of the limitations on extensions of credit imposed by Reg O (12 CFR Part 215).

Third, an inquiry must be made as to whether the ESOP is an affiliate of [Bank A] for purposes of 12 USC §371c, made applicable to nonmember insured banks by virtue of 12 USC §1828(j)(1). Affiliate is defined in 12 USC §371c(b)(1)(C) in pertinent part as:

(c) any company--

(i) that is controlled directly or indirectly, by a trust or otherwise, by or for the benefit of shareholders who beneficially or otherwise control, directly or indirectly, by trust and otherwise, the member bank or any company that controls the member bank; or

(ii) in which a majority of its directors or trustees constitute a majority of the persons holding any such office with the member bank or any company that controls the member bank.

12 USC §371c(b)(6) defines the term "company," as a "...corporation, partnership, business trust, association, or similar organization..." OCC Interpretative Letter No. 719 (May 1996) construes an ESOP to be a "business trust or similar organization." Accordingly, for purposes of 12 USC §371c, an ESOP is a "business trust or similar organization," which falls within the definition of "company." 12 USC §371c(b)(3)(A)(i)-(iii) defines the term "control" to include the power to vote twenty-five percent (25%) or more of any class of voting stock of the Bank, the power to appoint a majority of the board of directors or trustees of the Bank, or the power to influence the management and policies of the Bank. Therefore, if the ESOP is in "control" of [Bank A], it is an "affiliate" and subject to the provisions of 12 USC §371c.

The limitations of 12 USC §371c may also be applicable to the proposed loan to the ESOP if the ESOP is controlled by a trustee who controls, directly or indirectly, [Bank A]. 12 USC §371c (b)(3)(A)(i)-(iii) defines the term "control" to include the power to vote twenty-five percent (25%) or more of any class of voting stock of the Bank, the power to appoint a majority of the board of directors or trustees of the Bank, or the power to influence the management and policies of the Bank. If the executive officer that is the trustee of the ESOP has the power to influence the management and policies of [Bank A], then the proposed loan to the ESOP may be subject to the limitations of 12 USC §371c.

Finally, you may wish to consider that under 26 USC §4975(c)(1)(B), the lending of money or other extension of credit between a plan and a "disqualified person" is considered a prohibited transaction which is subject to federal taxation. 26 USC §4975(e)(2) defines "disqualified person" as "an employer any of whose employees are covered by the plan." However, under 26 USC §4975(d)(3), a loan to a leveraged employee stock ownership plan may be exempt from designation as a prohibited transaction if such a loan is primarily for the benefit of participants and beneficiaries of the plan, and such a loan is at a reasonable rate of interest, and any collateral which is given to a disqualified person by the plan consists only of qualifying employer securities. It is recommended that [Bank A] consult with a tax professional to ensure that its proposed loan to the ESOP will be qualified under the Internal Revenue Code §401, 26 USC §401.

The opinion is limited to the facts and circumstances stated in your letter of July 15, 1996, our telephone conversation of September 5, 1996. Any change in those facts or circumstances could result in a different conclusion regarding this issue.

Opinion No. 96-26

An Automated Loan Machine is considered an electronic terminal, not a branch, and may be established under ATM licensing rules.

November 18, 1996

D'Ann Johnson, Assistant General Counsel

Your letter of July 12, 1996 has been referred to me for response. You have asked what type of application and approval will be required from the Banking Department in order to install Automated Loan Machines ("ALMs").

An ALM is an automated and consumer-driven loan process. Through the use of new technology, a consumer can apply and receive a loan in a short period of time without intervention by bank personnel. The electronic terminal uses touch-screen technology and instant identity verification to receive and process loans. The terminals are similar in appearance to ATMs and may be accessible to consumers 24 hours a day. ALMs are not restricted to bank lenders.

The ALM requires the applicant to provide personal identification information, which the ALM verifies through a fraud detection analysis. After passing this analysis, the applicant provides background and financial information. If the applicant meets the basic underwriting requirements, the ALM obtains a credit report and applies the lenders' credit scoring to the application. If the applicant is approved, the applicant chooses insurance and repayment options and signs the loan documents appearing on the screen with an electronic pen. The applicant chooses how the funds will be disbursed, including the receipt of a cashier's check received at the electronic terminal or deposit into an existing account. No cash is disbursed and no deposits are taken. No credit decision is made at the terminal; rather the lending decision is made and funds are disbursed from the principal office of the financial services provider. Therefore, loans initiated through an ALM are not subject to the [Home Solicitation Transactions Act, now Tex. Bus. & Comm. Code §39.01 et seq.].

Under Texas law, an ALM is considered an electronic terminal. "Electronic terminal" means an electronic device, other than a telephone or modem operated by a customer of a depository institution, through which a person may initiate an electronic fund transfer, as defined in 15 USC §1693a(6). The term includes, but is not limited to, a point-of-sale terminal, automated teller machine, or cash dispensing machine. Tex. Rev. Civ. Stat. Ann. art. 342-1001(a)(19) ("Texas Banking Act") [now Finance Code §31.002(a)(19)]; see also 15 USC §1693a(7). An electronic terminal is exempted from the definition of branch under state law. See §1.001(a)(8) of the Texas Banking Act [now Finance Code §31.002(a)(8)]. Additionally, recent amendments to federal statutes likewise have clarified that the term "branch" does not include an automated teller machine or a remote service unit. As an electronic terminal, an ALM is subject to the standards of §3.204 of the Texas Banking Act [now Finance Code §§59.201, 59.202] and the safety standards required by the ATM User Safety Act, Tex. Rev. Civ. Stat. Ann. art. 342-903d [now Finance Code §§59.301 et seq.] and 7 TAC §3.92.

Currently, to establish an ATM, the Department requests that the bank inform the Department of the location, the date service will be initiated, and whether the terminal will be shared with another institution. These same requirements would apply to an ALM.

The conclusion in this opinion is limited to the facts as described. Please contact me if you have further questions.

Opinion No. 96-25

A violation of the legal lending limit does not excuse the borrower from repaying the loan.

September 16, 1996

D'Ann Johnson, Assistant General Counsel

This is in response to your letter of July 16, 1996. You have requested an opinion whether a borrower is excused from repaying a loan if, when the loan was made, the amount of the loan exceeded the bank's lending limit.

In such an instance, a borrower is not excused from repaying a loan. A violation of the lending limit statute does not enable a borrower to avoid repaying the funds received under a contractual agreement. A bank's lending limit is a matter between the government and the bank; it does not affect the validity of the contract or obligations of the parties. Teague Indep. School Dist. V. First State Bank, 241 S.W. 608, 613 (Tex. Civ. App.-Dallas 1922, writ ref'd). Lending limits are designed to protect the bank's finances, not to benefit borrowers. Valente v. Dennis, 437 F. Supp. 783, 786 (E.D. Pa. 1977). Moreover, excusing the borrower would sanction violations of the lending limit statute by compensating those who were parties to and beneficiaries of a forbidden excessive loan. Id. See also, Goldstein v. Union Nat'l Bank, 213 S.W. 584, 588 (Tex. 1919).

The United States Supreme Court has also held that a violation of the federal lending limit statute does not excuse the borrower from repaying the loan. Union Gold Mining Co. v. Rocky Mountain Nat'l Bank, 96 U.S. 640 (1878). The Court stated: " We do not think that public policy requires or that Congress intended that an excess of loans beyond the proportion specified should enable the borrower to avoid the payment of money actually received by him." Id. At 642.

In summary, a borrower is not excused from repaying a loan that was in excess of a bank's legal lending limit when the loan was made.

Opinion No. 96-19

Bank freeze-out mergers are permissible under Texas law.

May 23, 1996

Everette D. Jobe, General Counsel

Banking Commissioner Ghiglieri has requested that I respond to your letter dated April 15th, urging that the referenced, proposed merger not be approved as not in compliance with state and federal laws. Specifically, you object to the failure of the transaction to offer the same treatment to similarly situated shareholders, referring to the proposal as a "freeze out" merger. I have reviewed your letters of April 15th and May 10th as well as the reply letter from [*****] dated May 2nd. A "freeze out" merger is generally characterized as a merger in which selected shareholders receive stock in the new bank and all other shareholders must take cash under the terms of the plan of merger.

We disagree with your conclusion that a freeze out merger is impermissible under Texas law. The case you cite, Lewis v. Clark [sic], 911 F.2d 1558 (11th Cir. 1990), is not controlling, does not interpret Texas law, and in our view is an incorrect statement of the law governing bank mergers. The better view of modern law is expressed in NoDak Bancorporation v. Clarke, 998 F.2d 1416, 1423-24 (8th Cir. 1993). In our opinion, a freeze out merger is permissible under Texas law.

Pursuant to Tex. Rev. Civ. Stat. Ann. art. 342-3.007(a) [now Finance Code §32.008(a)], "[t]he Texas Business Corporation Act ... [applies] to a state bank to the extent not inconsistent with this Act or the proper business of a state bank." Tex. Bus. Corp. Act (TBCA) art. 5.01(B)(3) provides that a plan of merger must set forth "the manner and basis of converting any of the shares ... of each ... entity that is a party to the merger into shares, obligations, evidences of ownership, rights to purchase securities or other securities of one or more of the surviving ... entities, into cash or other property, ... or into any combination of the foregoing." (emphasis added). TBCA art. 5.06(A)(7) provides that "the former holders of the shares of each domestic corporation [in this context, a state bank] that is a party to the merger shall be entitled only to the rights provided in the articles of merger or to their rights under Article 5.11 of this Act." The articles of merger incorporates the plan of merger, see TBCA art. 5.04(A)(1).

TBCA art. 5.11 grants dissenters rights, implemented by the procedure set forth in TBCA art. 5.12 (also see Tex. Rev. Civ. Stat. Ann. art. 342-3.303 [now Finance Code §32.303]). As stated in TBCA art. 5.12(G), "[i]n the absence of fraud in the transaction, the remedy provided by this Article to a shareholder objecting to any corporate action referred to in Article 5.11 of this Act is the exclusive remedy for the recovery of the value of his shares or money damages to the shareholder with respect to the action."

Nothing in the literal language of these Texas statutes prohibits cashing-out minority shareholders in a merger transaction. Protection of the minority shareholders is accomplished through the statutory right to dissent and the right to pursue appropriate, additional remedies in the event of fraud. Assuming the proposed merger is approved by regulatory authorities (regarding which I make no representation), in the absence of fraud, your clients as their sole remedy have the option of accepting the consideration specified in the plan of merger or dissenting from the merger in accordance with statutory procedures.

Prior to August 26, 1985, to approve a merger under former Tex. Rev. Civ. Stat. Ann. art. 342-308 (repealed), we were required to find that the proposed merger "is to the best interest of the depositors, creditors and stockholders of the merging banks and of the public in general [and] that the distribution of the stock of the resulting bank is to be upon an equitable basis...." These quoted requirements were deleted in 1985 in connection with the addition of dissenters' rights to the Texas Banking Code, determined with reference to the TBCA; Acts 1985, 69th Leg., ch. 639, §7. Therefore, again assuming that we approve the proposed merger, our approval merely constitutes permission to proceed with the merger and should not be construed as an approval or endorsement of the adequacy of consideration offered to any shareholder.

Opinion No. 96-18

A leased facility 500 feet from the home office of a state bank is considered a home office extension and not a branch.

July 8, 1996

D'Ann Johnson, Assistant General Counsel

This is in response to your letter of April 12, 1996. You have requested an opinion whether a leased facility, approximately 500 feet from the home office would be considered part of the home office of the Bank or a new form of banking facilities under the provisions of the Texas Banking Act, Tex. Rev. Civ. Stat. Ann. arts. 342-1.001 et seq. (the "Act") [now codified in the Finance Code], particularly §3.201(c) of the Act [now Finance Code §32.201(c)]. Additionally, you have requested approval of the lease agreement for the new facility with a father and business partner of a director of the bank.

Texas has long-recognized an extension of bank office doctrine. See Tex. Rev. Civ. Stat. Ann. art. 342-903(1)(b) and (1)(d)(3) (repealed); 7 TAC §3.91 (repealed); and Op. Atty. Gen. JM-498 (1986). The statutes, amendments, regulations and decisions, however, have not necessarily distinguished between the types of services offered and the physical connection attributes of the additional facility. Id. at 11.

Repealed Article 342-903 was replaced with the Act, §§3.201-3.205 [now Finance Code §§32.201-32.204, 59.201]. The Act also includes a definition of "home office" in §1.002(a)(30) [now Finance Code §31.002(a)(30)]. These provisions primarily address the types of services provided at different types of banking facilities. See §3.201(a) - drive in facilities  [now Finance Code §32.201(a)]; §3.201(b) - an office that does not involve banking contact with the public [now Finance Code §32.201(b)]; §3.201(c) - a new form of banking facility [now Finance Code §32.201(c)]; §3.203 - branch offices [now Finance Code §32.203]; §3.204 - electronic terminals [now Finance Code §59.201]; and §3.205 - loan production offices [now Finance Code §32.204]. The physical connection attributes concept, derived from prior statutes and opinions, is included by inference in the [Finance Code], most explicitly in [Finance Code §32.201(a)]. This section provides that a drive in facility within 2,000 feet of the nearest wall of a bank's home or branch office is considered an extension of that office.

Under the [Finance Code], we have not previously determined what other factors may be considered in determining whether a facility is an extension of an existing office. We note that the OCC has identified a nonexclusive list of factors that are relevant in making such a determination. We consider the following factors relevant:

•  The distance between the existing office and the proposed facility.

•  Whether there is a direct line of sight between the two facilities and how the intervening space is used.

•  Whether the two facilities are connected in any way, such as by a pneumatic tube.

•  The purpose of the proposed facility.

•  Whether the facility is physically situated in such a way as to give the bank a material advantage over competitors in attracting customers.

•  The dependency of the proposed facility on the existing office.

•  The availability for expansion of adequate sites closer to the existing office.

•  The existing facility's demonstrated need for such a facility.

•  Whether a national bank could operate a proposed facility as an extension.

•  Whether the arrangement provides convenience to the customers of the bank.

A determination whether a particular facility is an extension or some other form of banking facility must be made on a case by case basis. None of the factors alone is controlling. According to the facts as you have described them, the Bank has outgrown its current headquarters. The Bank proposes to use the facility to initiate a small consumer loan organization for area residents. The Bank contemplates that a competent lending officer will office at the leased facility, take and process loan applications, and prepare and execute loan documents. However, funding of the loans will occur at the existing bank facility. Additionally, the facility will house a collection officer and provide for supplemental parking spaces. You have also indicated that this location is approximately 500 feet from the present facility. There is a direct line of sight between the two facilities and no closer facility is available. The intervening space is occupied by some small business operations.

Based on these facts, we have determined that the proposed facility will be an extension of the existing home office and not a branch. Please notify the Department five days prior to the opening of the extension office. Please provide the address of the extension in the notice. You should also contact the appropriate federal regulator regarding their requirements.

Regarding your second question, you stated that the director is not involved in a business partnership involving real estate leasing rentals with his father and that he has no financial interest in this property. Additionally, a disinterested majority of the Board, excluding the affected director, approved the lease and the lease payment of $250 monthly.

Based on the facts as you have described them, approval by the Banking Commissioner of the lease agreement for the new facility is not required under the Act, §4.107(b).1

Opinion No. 96-15

A trust company may receive trustee fees based on the investment income of trusts in this particular circumstance because proposed contractual and policy restrictions on investments will substantially ameliorate any conflicts of interest that could arise.

May 24, 1996

Jerry G. Sanchez, Assistant General Counsel

Your letter to Larry Hearn of our office has been forwarded to me for response. You requested an opinion from the Texas Department of Banking (the "Department") regarding the proposed activity of [*****], to serve as trustee for church bond issues. In particular, you indicate that [*****] would like to accept appointments as trustee for church bond issues which require all or a portion of the underwriter's and/or trustee's fees be derived from investments of bond proceeds or sinking fund payments. You assert that it is common practice in the church bond industry for churches to have the option to use all or a portion of the investment income on those funds to pay the fees of the trustee and underwriter. However, because the trustee's fees will be measured by the amount of the underlying investments, a conflict of interest may arise between a trustee's fiduciary duty to preserve the trust income for the income beneficiaries and remaindermen and the payment of its own fees as measured by the amount of investment income from bond proceeds and sinking funds.

The investment provisions in the proposed new trust indentures and [*****'s] investment policies impose quality, maturity, and diversification restraints designed to meet liquidity necessary to fund scheduled bondholder maturities. The trust indenture for new issues will restrict investments of the bond proceeds account and the bond redemption and interest payment account to: (1) direct obligations of, and obligations fully guaranteed by, the United States of America, or any agency or instrumentality of the United States of America; (2) demand and time deposits in, or certificates of deposits of, any depository institution or trust company incorporated under the laws of the United States of America or any state thereof and subject to supervision and examination by federal and/or state banking authorities; (3) pooled or common trust funds of Trustee or an affiliate of Trustee acting as trustee and custodian, or registered funds comprised of any of the above-captioned eligible investments; (4) repurchase agreements fully collateralized by U.S. Treasury obligations; and, (5) money market or investment funds consisting of any or all of the defined eligible investments.

[*****'s] investment policies further prohibit investing in any security with a maturity of more than four years and require that [*****] maintain an overall average maturity on a dollar weighted basis of no more than 180 days. Each month, management will provide the Board with a Sinking Fund Liquidity Analysis showing the sources for funding the semi-annual bondholder disbursements scheduled for the next 12 months, and the Board must review and approve the current trust investments as suitable for current liquidity requirements. [*****'s] policy requires that the investments of bond proceeds and sinking funds be valued monthly using end of the month market values. Investments may be sold only on Board approval based upon a determination that it appears likely that current liquidity requirements will not permit the investment to be held to maturity.

Tex. Prop. Code §113.051, generally provides that, "... the trustee shall administer the trust according to its terms and this subtitle..." and "... in the absence of any contrary terms in the trust instrument or contrary provisions of this subtitle, in administering the trust the trustee shall perform all of the duties imposed on trustees by the common law." The Tex. Prop. Code §113.056(a) (the "Code"), provides that, "... a trustee shall exercise the judgment and care under the circumstances then prevailing that persons of ordinary prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds considering the probable income from as well as the probable increase in value and the safety of their capital." The Code, §113.056(b), provides further that, "... a trustee may acquire and retain every kind of property and every kind of investment that persons of ordinary prudence, discretion, and intelligence acquire or retain for their own account." The Code, §113.101(a), specifically provides that a trustee shall administer the trust with due regard for the interests of income beneficiaries and remaindermen with respect to allocation of receipts and expenditures to income or principal. The Code, §113.171(a), provides further that, "... a bank or trust company qualified to act as a fiduciary in this state may establish common trust funds to provide investments to itself as a fiduciary..." The Code, §113.171(b), further provides that, "...the fiduciary or cofiduciary may place investment funds in interests in common trust funds if: (1) the investment is not prohibited by the instrument or order creating the fiduciary relationship; and (2) if there are cofiduciaries, the cofiduciaries consent to the investment." Additionally, Articles 342-1101 et seq., of the Texas Banking Code [now Finance Code §§181.001 et seq.], does not prohibit the payment of trustee fees measured by the amount of investment income from bond proceeds and sinking funds.

In the past, the Texas Department of Banking has objected to the payment of trustee fees measured by the amount of investment income from bond proceeds and sinking funds because of serious conflict of interest concerns. A conflict of interest may arise between the trustee's fiduciary duty to preserve the trust principal for the income beneficiaries and remaindermen, and the payment of its own fees as measured by the amount of investment income from bond proceeds and sinking funds. However, it appears that [*****'s] proposed contractual and policy restrictions on investments will substantially ameliorate any conflicts of interest that could arise as a result of the trustee and/or the underwriter receiving all or a portion of the earnings on these funds as fees pending disbursement to the bondholders. Therefore, [*****'s] proposed appointment as trustee for church bond issues wherein it will receive its fees in the form of investment income from bond proceeds and sinking funds, is permissible. However, we are also of the opinion that any loss of principal in such an arrangement is per se a breach of trust and must be immediately restored to the trust by [*****] out of its corporate funds. In this regard, we expect [*****] to maintain monthly valuations of the investment portfolio. We also expect [*****] to maintain capital, in excess of that required under Article 342-1108 of the Texas Banking Code [now Finance Code §182.103], sufficient to absorb any market depreciation of the investment portfolio.

This opinion is limited to the facts and circumstances set forth in your letter, and any change in those facts or circumstances may result in a different opinion. Please call me if you have any questions or comments.

Opinion No. 96-11

A state bank may acquire a company that provides consulting services to depository institutions.

May 6, 1996

D'Ann Johnson, Assistant General Counsel

This letter is in response to your letter dated April 2, 1996. You have requested confirmation that your client, a state bank, may acquire a company that provides consulting services with regard to designing loan applications and other forms, providing operations analysis and inventory control to other depository institutions and operate it as a subsidiary. You have also requested confirmation that the contemplated activities are "activities that may be engaged in directly by the bank" for purposes of §5.103(b) of the Texas Banking Act [now Finance Code §34.103(b)].

We view the contemplated activities you describe as activities that may be engaged in directly by the bank, and therefore conclude that your client may acquire a company providing such consulting services to other depository institutions.

A state bank may engage in any activity, directly or through a subsidiary, authorized by the [Finance Code] or determined by the Banking Commissioner to be closely related to banking. Sec 3.001(a)(4) [now in substance Finance Code §32.001(b)(6), pertaining to activities financial in nature, and (b)(7)]. Additionally, a state bank may exercise incidental powers necessary to carry on the business of banking. Sec. 3.001(a)(1) [now Finance Code §32.001(b)(1)]. Providing consulting services for depository institutions is considered incidental to the business of banking and is an activity that may be engaged in directly by the bank.

Likewise, providing the consulting services you describe does not violate §5.107 of the Texas Banking Act [now Finance Code §34.107].

This opinion is limited to the facts and circumstances stated in your letter of April 2, 1996. Any change in those facts or circumstances may result in a different opinion.

Opinion No. 96-9

Substantial financial interdependence does not exist between related entities and the loans are therefore not aggregated for legal lending limit purposes, even though an accommodation guaranty exists.

April 18, 1996

Jerry G. Sanchez, Assistant General Counsel

This letter is in response to your letters dated January 11, 1996, and February 23, 1996. You requested an opinion as to whether a proposed $500,000.00 line of credit for [*****] Timber Co., should be aggregated with the indebtedness of [Persons A's and B's] broiler farm ($330,139.00) and [*****] Farms, Inc. ($249,648.00), for lending limit purposes.

Based solely on the information in your letters, my understanding of the facts are as follows:

1.  Three entities are involved: [Persons A's & B's] broiler farm; [*****] Farms, Inc.; and [*****] Timber Co., Inc.;

2.  [Person A] owns 50% of [Persons A's & B's] broiler farm, 100% of [*****] Farms, Inc., and [*****] Timber Co., Inc.;

3.  [*****] Timber Co., Inc.'s debt is personally guaranteed by [Person A];

4.  [Person A] is the President of all three entities;

5.  None of the gross receipts or expenditures of the three entities (on an annual basis) are derived from transactions with each other;

6.  The sole interrelated transaction between the entities involved the recent sale of commercial real estate from [*****] Farms Inc., to [*****] Timber Co., evidenced by a promissory note secured by a second lien on said property; and,

7.  The actual source of repayment of the outstanding indebtedness of the [Persons A's & B's] broiler farm ($330,139.00) and [*****] Farms, Inc. ($249,648.00), is derived from income received from the sale of birds raised on each farm, and the actual source of repayment of [*****] Timber Co.'s indebtedness is derived from the sale of timber.

Under TEX. REV. CIV. STAT. art. 342-5.201(a) (the "Act") [now Finance Code §34.201(a)], the total loans and extensions of credit by a state bank outstanding at any one time to a person may not exceed 25% of the bank's capital and certified surplus.1 The term "loans and extensions of credit" are defined in the Act, §1.002(a)(34) [now Finance Code §31.002(a)(34)], as "...direct or indirect advances of funds by a state bank to a person that are conditioned on the obligation of the person to repay the funds or that are repayable from specific property pledged by or on behalf of the person."

Under 7 TAC §12.9, a loan or extension of credit to one borrower is attributed to another person, and each person will be considered a borrower if a common enterprise is deemed to exist or the expected source of repayment for each loan or extension of credit is the same for each person. Under 7 TAC §12.9(c)(1), a common enterprise is considered to exist and loans to separate borrowers will be aggregated if a loan or extension of credit is made to borrowers who are related directly or indirectly through common control, or made to a borrower directly or indirectly controlled by another borrower, if substantial financial interdependence exists between or among the borrowers. Under 7 TAC §12.9(c)(2), substantial financial interdependence exists if 50% or more of one borrower's gross receipts or gross expenditures (on an annual basis) are derived from transactions with the other borrower and is presumed to exist, subject to rebuttal, if 25% or more of one borrower's gross receipts or gross expenditures (on an annual basis) are derived from transactions with the other borrower. Gross receipts and expenditures include gross revenues and expenses, intercompany loans, dividends, capital contributions, and similar receipts and payments.

Because none of the entities' gross receipts or expenditures (on an annual basis) are derived from transactions with each other, it does not appear that a common enterprise exists between the entities. The one-time sale of commercial real estate from [*****] Farms, Inc., to [*****] Timber Co., is insufficient to constitute a common enterprise. Additionally, although [Person A] owns 50% of the [Persons A's & B's] broiler farm, 100% of [*****] Farms, Inc., and [*****] Timber Co., Inc., and he personally guaranteed [*****] Timber Co., Inc.'s indebtedness, it does not appear that [Person A] is the primary source of repayment for the [*****] Farms, Inc., and [*****] Timber Co., Inc., indebtedness. The actual source of repayment of the outstanding indebtedness of the [Persons A's & B's] broiler farm and [*****] Farms, Inc., is derived from income received from the sale of birds raised on each farm, and the actual source of repayment of [*****] Timber Co.'s indebtedness is derived from the sale of timber. Therefore, because it does not appear that a common enterprise exists between the three entities and the actual source of repayment for each of the entities' loans or extensions of credit is not the same person, it does not appear that the entities' loans or extensions of credit will be aggregated for lending limit purposes.

Also, under 7 TAC §12.9(g), the derivative obligation of a guarantor is not aggregated with direct loans or extensions of credit of the guarantor if the lending bank is relying primarily on the creditworthiness of the primary obligor. The reliance of the lending bank on the primary obligor must be evidenced by the certification of the bank officer that the bank, is on stated facts, relying primarily on the responsibility and financial condition of the primary obligor for repayment of the loan or extension of credit and not on the guarantee of the guarantor. Therefore, if your bank has the requisite certification, supported and evidenced by financial information in the bank's files and actual operating practices by the bank and the parties, that it is relying primarily on the creditworthiness of [*****] Timber Co., Inc., and not the personal guarantee of [Person A], then [*****] Timber Co., Inc.'s indebtedness need not be aggregated with [Person A's] indebtedness for purposes of the legal lending limit. If your bank does not have the requisite certification and financial information, [*****] Timber Co., Inc.'s indebtedness may be aggregated with [Person A's] indebtedness by examiners for purposes of the legal lending limit.

Please be advised that although the three entities' indebtedness need not be aggregated for purposes of the 25% general lending limit, under 7 TAC §12.9(e), loans or extensions of credit by a bank to a corporate group may not exceed 75% of the lesser of bank's capital and certified surplus or the bank's total equity capital. For purposes of 7 TAC §12.9(e), a "corporate group" includes a person and all of its subsidiaries, and a corporation or other entity is a subsidiary of a person if the person owns or beneficially owns directly or indirectly more than 50 percent of the voting securities or voting interests of the corporation or other entity.

Your bank is further cautioned that the purpose of the lending limit is to reduce risk by preventing one individual, or a relatively small group, from borrowing an unduly large amount of the state bank's funds. These types of loans will be closely scrutinized by an examiner.

Finally, this opinion is limited to the facts and circumstances set forth in your letters, dated January 11, 1996, and February 23, 1996, and subsequent telephone conversations between you and my office. Any change in those facts, circumstances, or the parties to the transaction may result in a different opinion.

Opinion No. 96-4

The obligation of a bank customer/auto supplier, to repurchase residual value of leased autos from a state bank/lessor at the end of lease term, is not a loan to the customer/auto supplier for legal lending limit purposes.

April 15, 1996

Jerry G. Sanchez, Assistant General Counsel

Your letter dated February 5, 1996, has been forwarded to me for response. You requested an opinion as to whether the residual values of automobiles under The First State Bank of [*****'s] ("First State") automobile leasing program should be allocated to the lending limit of [*****] Leasing Inc. ("Corp."). Corp. is an independent company, based in Corp., Texas, which provides various bank services.

First State primarily disseminates the availability of its automobile leasing program through utilization of brochures, available in its lobby, and by having its loan officers verbally inform potential leasing customers of the leasing program. First State refers these bank customers to Corp. The bank customers are qualified by First State on the basis of their creditworthiness only. Corp. and each bank customer enter into written lease agreements. These lease agreements, along with ownership of the automobile(s), are assigned to First State which pays Corp. lease transaction fees. Following First State's acceptance and approval of a lease agreement, it pays the draft submitted by the car dealership which has supplied the automobile to be leased.

In the event that a lease is paid in full at the end of its lease term, Corp. is obligated to repurchase the automobiles from First State for their residual values. Corp.'s obligation to repurchase the leased automobiles does not entail First State advancing funds to Corp. When Corp. pays the residual value of an automobile, Corp. acquires ownership of the automobile. Utilizing a standardized guidebook, Corp. sets the residual values of the automobiles and estimates that only 15% of the automobiles will actually go to the end of the lease terms. In the event of an early termination of a lease, Corp. is not obligated to repurchase the automobiles or for any loss incurred on the automobiles.

Under Tex. Rev. Civ. Stat. art. 342-5.201(a) (the "Act") [now Finance Code §34.201(a)], the total loans and extensions of credit by a state bank outstanding at any one time to a person may not exceed 25% of the bank's capital and certified surplus.1 The term "loans and extensions of credit" are defined in the Act, §1.002(a)(34) [now Finance Code §31.002(a)(34)], as "...direct or indirect advances of funds by a state bank to a person that are conditioned on the obligation of the person to repay the funds or that are repayable from specific property pledged by or on behalf of the person."

Although Corp. is obligated to repurchase leased automobiles at the end of their lease term, First State is not directly or indirectly advancing funds to Corp. for the repurchase of these leased automobiles. Therefore, Corp.'s obligation to repurchase the leased automobiles does not constitute a loan or extension of credit as defined in [Finance Code §31.002(a)(34)]. Accordingly, the residual values of the leased automobiles which Corp. is obligated to repurchase at the end of the lease terms need not be allocated to Corp.'s lending limit. Of course, it would be prudent for the bank to be aware of the extent and condition of Corp.'s obligations to First State under the leasing program in connection with a future decision to extend credit to Corp.

This opinion is limited to the facts and circumstances in your letter, dated February 5, 1996, and subsequent information provided by you, and any change in those facts and circumstances may result in a different opinion. Please call me if you have any further questions.

Opinion No. 96-2

Participation established in a commitment letter is excluded from legal lending limits to the extent it results in pro rata sharing of risk.

March 25, 1996

Jerry G. Sanchez, Assistant General Counsel

Your letter dated January 5, 1996, to Larry Hearn has been forwarded to me for response. You requested an opinion as to whether a certain commitment letter, as opposed to a participation agreement, is adequate to cover the unfunded portion of certain construction loans which would cause [Bank A] to exceed its legal lending limit.

Specifically, [Bank A] seeks to make ten loans to [*****], Inc., at $100,000 each for a total line of credit of $1,000,000, with the amount funded on the loans totaling $500,000. [Bank A]'s lending limit is $700,000. The copy of the December 1, 1995, commitment letter from [Bank B] provides that they have approved a loan participation request up to $900,000 in a $1,250,000 line of credit to [Bank A]. [Bank B's] commitment letter specifies the loan amounts, interest rate, purpose, maturity date, collateral, and allocation of interest and principal payments. [Bank B]'s commitment letter does not specify if there will be a pro rata sharing of credit risk between it and [Bank A].

Under 7 TAC §12.4(a), "a commitment to lend, when combined with all other loans or extensions of credit to a borrower, must be within the bank's legal lending limit at the time the commitment becomes binding, and advances may be made under a binding agreement to lend even if the advances would exceed the bank's holding lending limit on the date of funding." To determine whether a commitment to lend is within a bank's lending limit when made, a bank may deduct from the amount of the commitment the amount of each legally binding loan participation agreement executed concurrently with the bank's commitment that would be excluded from a loan or extension of credit under 7 TAC §12.3(b)(3). Under §12.3(b)(3), loans or extensions of credit do not include "that portion of a loan or extension of credit sold as a participation by a bank on a nonrecourse basis, provided the participation results in a pro rata sharing of credit risk proportional to the respective interests of the originating and participating lenders. . ."

Although a formal participation agreement is not specifically required by §12.4(a) and §12.3(b)(3), §12.3(b)(3) requires that the participation result in a pro rata sharing of credit risk proportional to the respective interests of the originating and participating lenders. Therefore, so long as the participation established by [Bank B]'s December 1, 1995, commitment letter results in a pro rata sharing of credit risk between it and [Bank A], [Bank A]'s commitment to lend $1,000,000 will not cause it to exceed its $700,000 legal lending limit.

This opinion is limited to the facts and circumstances set forth in your letter, dated January 5, 1996, and any change in those facts and circumstances may result in a different opinion. Please call me if you have any questions or comments.

Opinion No. 95-72

A state bank may provide internet access for bank customers.

February 15, 1996

Everette D. Jobe, General Counsel

By letter dated December 21, 1995, you inquired whether a state bank has authority to provide Internet access through the bank for bank customers.

A state bank may engage in any activity, directly or through a subsidiary, authorized by the Texas Banking Act (the "Act") or determined by the Banking Commissioner to be closely related to banking, Act §3.001(a)(4) [now in substance Finance Code §32.001(b)(6), pertaining to activities financial in nature, and (b)(7)]. Additionally, a state bank may exercise incidental powers necessary to carry on the business of banking, Act §3.001(a)(1) [now Finance Code §32.001(b)(1)]. Section 5.107 of the Act [now Finance Code §34.107] prohibits a state bank from investing funds in trade or commerce by selling or otherwise dealing in goods or owning or operating a business not part of the business of banking.

Allowing bank customers to access the bank's Internet provider through the bank's system presents novel issues. You state that you intend to provide access only to bank customers. Because the bank is using this resource itself and is selling excess capacity only to its customers, we conclude that the bank is not owning or operating a business not part of the business of banking or engaging in commerce. Selling excess capacity in the bank's Internet connection is incidental to the bank's use of this resource, which itself is incidental to the business of banking. Therefore, the bank is empowered to provide this service.

Safety and soundness issues must be considered. The security of the bank's computer system must remain inviolate, and thoughtful precautions should therefore be taken to ensure that the system is insulated from viruses and unauthorized access to information. Computer "hackers" can be very skillful and no security system is foolproof. As to financial issues, you advise that you can provide this service for an estimated $2,000 additional investment beyond the $8,000 the bank will invest to gain Internet access for itself. You represent that this expense and any income from this endeavor will not be of any significance to your financial condition. Based on your representations, we believe the bank is empowered to make the additional investment.

The bank should conduct the activity pursuant to a written agreement with each customer that appropriately allocates risk and should maintain complete files of the activity for examination purposes. We also recommend notifying the bank's bonding company of the new activity being conducted by the bank.

Opinion No. 95-71

A state bank may establish a university branch.

February 15, 1996

Everette D. Jobe, General Counsel

By letter dated December 18, 1995, you advised that you were in the process of applying to the Office of the Comptroller of the Currency for approval to operate a "University Branch" as defined in OCC Advisory Letter 94-6, and requested the opinion of this Department whether Texas state chartered banks are allowed to establish such a branch under state law.

Texas law and regulations do not specifically address a "university branch" or other types of limited service branches, although limited purpose branches are permitted. Such branches are applied for and approved in the same manner as full service branches. Thus, a state bank may establish a "university branch" in the same manner as it would establish any branch. Expedited treatment is generally available for branch applications of eligible banks, see 7 TAC §15.3, copy enclosed. "Eligible bank" is defined in 7 TAC §15.1 as a bank that:

[Quoted text omitted; see 7 TAC §15.1]

Opinion No. 95-66

A state bank may not pledge assets to secure industrial development corporation bonds.

January 9, 1996

Jerry G. Sanchez, Assistant General Counsel

Your letter of December 1, 1995, to Everette Jobe, General Counsel of the Texas Department of Banking, has been referred to me for review. You inquired as to whether your bank is required to pledge assets to secure [*****] IDC funds on deposit with your bank.

The copy of the [*****] IDC's articles of incorporation which you provided to us, indicates that the [*****] IDC was incorporated on or about August 3, 1993, in accordance with Article 5190.6, the Development Corporation Act of 1979 (the "Development Act"), for the purpose of "... promoting and developing industrial and manufacturing enterprises to promote and encourage employment and the public welfare of the City of [*****]..." In connection thereof, the [*****] IDC can finance, issue bonds, develop, assist, and undertake promotions, programs and projects. The [*****] IDC's board of directors are appointed by the governing body of the City of [*****], Texas, and serve at its pleasure. However, as a nonprofit, nonstock, corporation, the [*****] IDC is a separate legal entity under Texas law.

Texas Banking Act, §5.304(a) [now Finance Code §34.304(a)], provides that "...a state bank may not pledge or create a lien on its assets or secure the repayment of a deposit except as authorized or required by this section, rules adopted under this Act, or other law." Texas Banking Act, §5.304(b) [now Finance Code §34.304(b)], further provides that "...a state bank may pledge its assets to secure a deposit of this state, an agency or political subdivision of this state, the United States, or an instrumentality of the United States." The pertinent question is whether the [*****] IDC is "an agency or political subdivision of this state." Section 22 of the Development Act provides that a development corporation "... is not intended to be and shall not be a political subdivision or a political corporation within the meaning of the constitution and the laws of the state..." Section 22 of the Development Act also provides that bonds issued by a development corporation are "... deemed not to constitute a debt of the state, of the unit, or of any other political corporation, subdivision, or agency of this state or a pledge of its full faith and credit, and such bonds are payable solely from the funds derived from ... revenues." Therefore, under [Finance Code §34.304(b)], your bank is not authorized or required to pledge assets to secure the [*****] IDC deposits in your bank.

Opinion No. 95-61

A successor trustee is not liable for improper investments made by the prior trustee but is obligated to take reasonable action to correct the breach of trust once discovered.

November 28, 1995

Sharon Gillespie, Assistant General Counsel

You have asked the Department of Banking (the "Department") for assurance that [*****] Bank, a successor trustee, will not be held liable for improper investments made by the prior trustee. Section 114.002 of the Texas Property Code sets out the rule for liability in such situations:

A successor trustee is liable for a breach of trust of a predecessor only if he knows or should know of a situation constituting a breach of trust committed by the predecessor and the successor trustee:

(1) improperly permits it to continue;

(2) fails to make a reasonable effort to compel the predecessor trustee to deliver the trust property;1 or

(3) fails to make a reasonable effort to compel a redress of a breach of trust committed by the predecessor trustee.

Under this standard, once a successor becomes aware of a breach of trust, e.g., as in this instance, of improper investments, the successor becomes obligated to take reasonable action to correct the breach.

I am aware that you have been working closely with the Department and the Attorney General's Office to resolve the problems with the subject investments. Furthermore, it is my understanding that it would be imprudent at this time to convert the trust property to permissible investments. Instead, you are steadily improving the liquidity of the trust assets, which, in the view of our staff, is the proper way to handle them. It is also my understanding that to pursue the predecessor trustee, who is in bankruptcy, would be futile. On these facts, if no additional breach of trust occurs and you continue to manage the property in the prudent manner that you have in the past, the Department is satisfied you will fully discharge the obligation imposed on you as a successor trustee under §114.002.

Opinion No. 95-59

A state bank or its subsidiary may invest in a limited liability company under certain conditions.

December 11, 1995

Everette D. Jobe, General Counsel

By letter dated October 19, 1995, you requested our opinion concerning whether a subsidiary of a Texas-chartered bank, or the bank itself, may invest in a limited liability company ("LLC") pursuant to the Bank Service Corporation Act, 12 USC §§1861 et seq. ("BSC Act"), the other members of which would be the state and national bank subsidiaries of [*****]

The Texas Banking Act, Tex. Rev. Civ. Stat. Ann. arts. 342-1.001 et seq. (the "Act") [now codified to Finance Code], directly addresses your question. Section 5.105(a)(1) [now Finance Code §34.105(a)(1)] authorizes a state bank to "purchase for its own account equity securities of any class issued by . . . a bank service corporation, except that not more than an amount equal to 15 percent of the bank's capital and certified surplus may be invested in a single bank service corporation and not more than an amount equal to five percent of its assets may be invested in all bank service corporations." The term "bank service corporation" is defined in §5.105(c)(3) of the Act [now Finance Code §34.105(c)(3)] as having the meaning assigned by the BSC Act.

As your letter stated, the BSC Act requires that a bank obtain approval from the Board of Governors prior to investing in a bank service corporation performing the services you propose. We assume the Board of Governors must first determine that a bank service corporation can be a LLC before it approves the investment. Therefore, if the Board of Governors acts affirmatively, a Texas-chartered bank may invest in the bank service corporation organized as a LLC. We request that you send us a copy of the determination of the Board of Governors for our files in this matter at your earliest convenience.

While unnecessary to resolve your question, the analysis you submitted demonstrating that the Act would permit a state bank subsidiary to be organized as a LLC is essentially correct. However, federal law must also be examined pursuant to 12 USC §1831a and 12 CFR Part 362, which restrict the powers of state banks. For present purposes, 12 CFR §362.3(a) adequately summarizes the import of these federal provisions by stating that "[n]o insured state bank may directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank." The Federal Deposit Insurance Corporation ("FDIC") issued two opinions in 1994 that, by implication, conclude that a state bank subsidiary cannot be in the form of a LLC, but indicated it would accept a determination by the Office of the Comptroller of the Currency ("OCC") that such an investment would be permissible for a national bank, FDIC Interpretive Letter Nos. 94-50 (October 12, 1994) and 94-52 (October 13, 1994). Because the OCC recently made a strong statement that a national bank can invest in a LLC, OCC Interpretive Letter No. 692 (November 1, 1995), we presume the question has been finally answered.

The OCC clearly stated in Interpretive Letter No. 692 that national banks may make investments in various entities, including a limited liability company, at levels less than that required for an operating subsidiary provided that the investment meets certain requirements or standards. These standards, distilled from previous OCC decisions over the years, are essentially four:

1.  The activities of the entity or enterprise in which the investment is made must be limited to activities that are part of, or incidental to, the business of banking;

2.  The investing bank must be in a position to prevent the enterprise or entity from engaging in activities that do not meet the foregoing standard and, to this end, the articles of organization or association and the operating or participation agreement, or similar documents, should specifically state this authority;

3.  The bank's loss exposure must be limited, as a legal and accounting matter, and the bank must not have open-ended liability for the obligations of the enterprise; and

4.  The investment must be convenient or useful to the bank in carrying out its business and not a mere passive investment unrelated to that bank's banking business.

Opinion No. 95-57

A state bank may provide bookkeeping and data processing services for itself and for affiliated banks.

September 26, 1996

D'Ann Johnson, Assistant General Counsel

Your letter of September 28, 1995 has been forwarded to me for response. You have indicated that [Corporation A] contemplates merging its wholly owned subsidiaries, [Corporations B & C] into [state bank].

A state bank may engage in any activity, directly or through a subsidiary, authorized by the Texas Banking Act (the "Act") or determined by the Banking Commissioner to be closely related to banking. Sec. 3.001(a)(4) [now in substance Finance Code §32.001(b)(6), pertaining to activities financial in nature, and (b)(7)]. Additionally, a state bank may exercise incidental powers necessary to carry on the business of banking. Sec. 3.001(a)(1) [now Finance Code §32.001(b)(1)]. Providing bookkeeping and data processing services for itself and affiliated banks is incidental to the business of banking.

Section 5.107 of the Texas Banking Act [now Finance Code §34.107] prohibits a state bank from investing funds in trade or commerce by selling or otherwise dealing in goods or owning or operating a business not part of the business of banking. Selling excess data processing capacity to one unaffiliated bank does not violate this section.

Because we have determined that the activity you described is authorized under the provisions of the [Finance Code], there is no need to examine whether the activity is permissible for national banks pursuant to §3.010 of the Act [now Finance Code §32.009].

This opinion is limited to the facts and circumstances stated in your letter of September 28, 1995. Any change in those facts or circumstances may result in a different opinion.

Opinion No. 95-55

A bank officer licensed as a real estate broker may receive customary commissions on the sale of property financed by the bank if certain conditions are satisfied.

December 6, 1995

Sammie K. Glasco, Assistant General Counsel

I have been asked to respond to your letter of October 10, 1995 to Catherine A. Ghiglieri, the Commissioner of Banking. You questioned in your letter whether it would be a violation of Article 342-417 of the Texas Banking Code for a bank officer, who is also a part-time real estate broker, to receive the customary real estate commission if [the bank] makes a loan to the buyer of property in which she has served as either the listing or selling agent. You explained in your letter that the bank officer in question is not on the loan committee of the bank and has no lending authority with either the bank or the mortgage company.

Most of the Texas Banking Code including Article 342-417 was repealed and replaced by Acts 1995, 74th Leg., ch. 914, §1, effective September 1, 1995.1 The new Texas Banking Act ("the Act") does not have a provision comparable to former Article 342-417, which was patterned after the federal Bank Bribery Act, 18 United States Code §215. Therefore, this practice does not violate any specific provision of the current Act. In addition, this Department interpreted former Article 342-417 as applicable to the decision maker regarding a loan or investment by a bank, and not to a person who refers a prospect for decision by another.

In this situation, the Texas Department of Banking would only have a concern if this practice violated some state or federal law or constituted a conflict of interest. Your attention is directed to the Bank Bribery Act, cited above and Texas Penal Code §32.43 which concerns commercial bribery. However, as stated above, the situation detailed in your letter does not violate any provision of the Act. In addition, it does not appear to present any type of conflict of interest which would be a safety and soundness issue for the Department as long as the bank officer in question is not a member of the Loan Committee, has no lending authority and is not able to influence, either directly or indirectly, the loan approval process.

Opinion No. 95-54

A subsidiary of an out-of-state bank may operate an ATM network in Texas.

December 21, 1995

Sharon Gillespie, Assistant General Counsel

By letter dated November 14, 1995, you have asked for approval of a proposal by [out-of-state bank ("Bank")] to engage in the ownership, installation, and operation of automated teller machines ("ATMs") in Texas through a subsidiary (the "subsidiary"). [Bank] has filed notice of this proposal with the Federal Reserve Board under the Bank Holding Company Act, 12 USC §§1841 et seq., and Regulation Y, 12 CFR §§225.1 et seq. As proposed, the subsidiary will install, service, and operate ATMs in various retail locations in Texas, either directly or through contract with third parties. The subsidiary will hold membership in national and regional ATM networks, including [a specific network], to facilitate ATM transactions by non-bank customers. [Bank] proposes to initially offer six ATM transactions: cash withdrawal from deposit and loan accounts; balance information regarding deposit, loan or other bank accounts; fund transfers between various bank accounts; bill payment; statement printing; and postage stamp purchases. The ATMs will not accept deposits, and all loan accounts from which withdrawals could be made would be pre-existing accounts. Any bank would have the right to use the ATMs on a non-discriminatory basis subject only to network and user bank technology limitations in full compliance with Tex. Const. art. XVI, §16(b), and §3.204(b) of the Texas Banking Act [now Finance Code, §§59.201-59.202], Tex. Rev. Civ. Stat. Ann. arts. 342-1.001 et seq. (the "Act," hereinafter referenced by section number) [now Finance Code, Title 3, Subtitle A]. The Texas Department of Banking has determined that neither [Bank] nor the subsidiary would engage in the business of banking by owning, installing and operating ATMs based on these facts.

Section 3.204(a) of the Act [now Finance Code §59.201(a)] authorizes [Bank] to own, install and operate electronic terminals in this state through the subsidiary: "[a] person or group of persons, for the convenience of customers of depository institutions, may install, maintain, and operate one or more electronic terminals at any location within this state." Section 1.002(a)(9) of the Act [now Finance Code §59.202(c)(2)] defines "electronic terminal" as "an electronic device, other than a telephone or modem operated by a customer of a depository institution, through which a person may initiate an electronic fund transfer, as defined in 15 USC §1693a(6)." The definition further states that an electronic terminal includes a "point-of-sale terminal, automated teller machine, or cash dispensing machine."

The definition of "branch" in the Act specifically excludes "an electronic terminal subject to §3.204 " [now Finance Code §59.201]." Section 1.002(a)(8) [now Finance Code §31.002(a)(8); also see §31.002(a)(19)]. As a consequence, your proposed activities are not characterized as branching. Furthermore, under the Act, "banking" is defined to be "the performance of the exclusive depository institution functions of accepting deposits and discounting loans and the performance of related activities that are not exclusive to banks or other depository institutions, including paying drafts or checks, lending money, and providing related financial services authorized by [the] Act." Section 1.002(a)(4) [now Finance Code §31.002(a)(4)]. Since your proposal does not include ATM acceptance of deposits or discounting of loans, neither [Bank] nor the subsidiary would be engaging in the business of banking under the proposal you have submitted.

This opinion is limited to the facts and circumstances stated in your letter of November 14th of this year and any facts or assumptions set out herein. Any change in those facts, circumstances, assumptions, or parties to the transaction may result in a different opinion.

Opinion No. 95-53

An out-of-state affiliate may conduct wire transfers as agent for a state bank without being considered a branch of the bank.

December 12, 1995

Sharon Gillespie, Assistant General Counsel

By letters dated November 6 and 16, 1995, you have inquired as to the legality of [an out-of-state] bank affiliate acting as agent for a state bank, specifically with respect to centralizing the wire transfer operations of [the state bank] with the [out-of-state affiliate at its out-of-state location]. Once these operations are centralized, a [state bank] deposit account customer could initiate a wire transfer either through [state bank] or through [the out-of-state affiliate at its out-of-state location]. In either case, a [state bank] employee will have access to the affected [state bank] account and will conduct the transaction for [state bank]. You ask whether [the out-of-state affiliate] will be considered a branch of the [state bank] if it conducts wire transactions directly on a [state bank's] customer account. You also ask whether the customer must be informed that an employee of the [out-of-state affiliate] is conducting the transaction on your behalf and whether any employee of your affiliates can have unlimited access to information regarding your customers.

The Texas Banking Act (Tex. Rev. Civ. Stat. Ann. arts. 342-1.001 et seq.) (the "Act") [now Finance Code, Title 3, Subtitle A], defines "branch" in §1.002(a)(8) [now Finance Code §31.002(a)(8)] as "a location of a bank, other than the bank's home office, at which the bank engages in the business of banking." Paragraph (F) of this subsection specifically excludes various facilities and services from the definition of a branch, including "a bank acting as an agent for a depository institution affiliate as provided by Section 8.009(a) of this Act [now Finance Code §59.005(a)]." Section 8.009(a) states that:

A bank subsidiary of a bank holding company may receive deposits, renew time deposits, close loans, service loans, and receive payments on loans and other obligations as an agent for a depository institution affiliate. Notwithstanding any other provision of law, a bank acting as an agent for a depository institution affiliate as provided by this section is not considered to be a branch of the affiliate.1

You have asked if the listing of activities in this provision is "all inclusive" or if the provision only sets out examples of services that the affiliate is authorized to provide. [Finance Code §59.005(a)] merely serves to list those activities that could result in application of a branch banking analysis. Wire transfer activities are not such an activity and, therefore, are not included in this listing. Providing wire transfer services as an agent does not convert the agent into a branch bank. Moreover, §8.009(c)(1) of the Act [now Finance Code §59.005(e)] provides that this "section does not affect . . . the authority of a depository institution to act as an agent on behalf of another depository institution under another law."2 Be advised however that wire transfer activities cannot be conducted by an affiliate acting as agent if prohibited by other state or federal law and that a depository institution that conducts activity as an agent on behalf of another depository institution under another law may be considered to be a branch of the other institution for such purposes. See the Act §8.009(b), (c)(2) [now Finance Code §§59.005(b), (e)(2)]. You should also be aware that an agency relationship between depository institutions under [Finance Code §59.005(a)] must be on terms that are consistent with safe and sound banking practices and all applicable rules.

With respect to customer confidentiality, you have indicated that [state bank] intends to add a statement to its depository contract that information may be shared with affiliates. With the exception of laws inapplicable to your inquiry, e.g., restrictions on bank sharing of customer data with federal agencies under the Right to Financial Privacy Act of 1978, 12 USC §§3401 et seq., statutory law regarding the confidentiality that banking institutions owe their customers is virtually nonexistent. For example, Tex. Civ. Prac. & Rem. Code Ann., §30.007(b)(7) [now Finance Code, §59.006(a)(8)] specifically provides that its privacy provisions (relating to compelled discovery from a financial institution) do not apply to "the voluntary use or disclosure of a customer record by a financial institution subject to other applicable state or federal law." Despite this void, the common law right of privacy protects information which the bank has relating to its customers. Individual customers can, however, waive the right to privacy as it applies to them. See 59 Tex. Jur.3d Privacy §6 (1988) and authorities cited therein. Therefore, the precaution of contracting with bank customers to permit the full-breadth of release you anticipate is advisable. Also, since customer damage resulting from release of information through theft or embezzlement could result in liability to the bank, you may wish to address involuntary releases of customer information in the depository contract as well.3

This opinion is limited to the facts and circumstances stated in your letters of November 6th and 16th of this year and any facts or assumptions set out herein. Any change in those facts, circumstances, assumptions, or parties to the transaction may result in a different opinion.

Opinion No. 95-31

A state bank may give free, prepaid long distance telephone cards to its customers and later accept a fee from the card issuer if a card is renewed.

March 19, 1996

Everette D. Jobe, General Counsel

As we discussed by telephone, [*****] requested an opinion regarding the above question by letter dated July 27, 1995. My letter in reply, dated July 31, 1995, stated in effect that we suspected the answer was negative but additional research would be required.

Because some national banks were already engaged in the activity, on September 1, 1995, I wrote a letter to the Office of the Comptroller of the Currency (OCC) requesting the views of the legal staff in Dallas. The OCC responded by letter dated January 10, 1996, stating that the activity was permissible for a national bank provided certain precautions were taken by the bank. Pursuant to §3.010 of the Texas Banking Act [now Finance Code §32.009], we adopt the analysis of the OCC and conclude that the activity is permissible for a state bank as well, subject to the same precautions, as noted further below.

The activity described above is permissible for a state bank because the card is being offered free, rather than sold, to bank customers as an inducement for them to take advantage of the bank's services. As a promotional item, the card is part of the bank's overall marketing effort for its services. Such an effort on the part of the bank is permissible under the general bank powers' provisions of the Texas Banking Act, §3.001(a)(1) [now Finance Code §32.001(b)(1)]. Furthermore, the fee being received by the bank is compensation for its services in bringing together the telephone service provider and the bank customer, a service which is specifically addressed in 7 TAC §11.83(d).

There are, however, two precautions that a state bank would be required to take before engaging in the above activity. First, the bank must make sure that the customer is appropriately informed that he or she is dealing with the service provider as far as the telephone services are concerned, so that the customer will not look to the bank should some problem develop with the card. And, second, the bank should ensure that the contract between it and the telephone card issuer provides for (a) holding the bank harmless for any problems which might develop with the card or the issuer's servicing efforts; (b) a clear disclaimer that any relationship exists between the bank and the card users (bank customers) regarding the provision of telephone services; and, (c) assurance that the telephone service provider/card issuer has obtained all the requisite federal and state regulatory clearances (e.g., from the Federal Communications Commission, the Texas Public Utilities Commission, etc.) necessary for it to engage in the telephone card program with the bank. If these precautions are taken, then the bank may proceed with its program.

Opinion No. 95-26

Loans to company's officers to secure employee stock options, secured by company stock, are not aggregated for legal lending limit purposes if there is another primary source of repayment.

June 14, 1995

Everette D. Jobe, General Counsel

By letter dated May 24, 1995, you requested whether certain loan transactions proposed by [*****] Bank (the "Bank") would be aggregated for purposes of legal lending limit analysis under Article 342-507 of the Texas Banking Code [now Finance Code §34.201]. We conclude that the loan transactions you describe should not be aggregated.

You indicated that the Bank is presently working with [*****], a publicly traded company, in a financial arrangement to offer your bank's lending services to approximately 68 individuals employed by the company in order to assist them in exercising their employee stock options. The plan allows these officers to purchase [*****] stock at a price substantially below market price, resulting in income taxes owed to the Internal Revenue Service payable at the time the option is exercised. Specifically, the Bank would provide short term loans to the officers for the taxes owed as a result of exercising the stock options. Each officer, on his or her own merit, would apply and qualify for the loan. Each loan will be secured by company stock and would not exceed 35% of the market value of the stock pledged to the loan. The primary source of repayment would consist of each individual's cash flow. Sale of the collateral stock would occur only as a secondary source of repayment.

Under these circumstances, we are of the opinion that the described loans would not be aggregated for legal lending limit analysis. We conclude that the "direct benefit" of the loan is for the borrower and not [*****], and that the "expected source of repayment" is the borrower and not [*****], see 7 Tex. Admin. Code §12.4(a) [now 7 TAC §12.9(d)]. We assume for purposes of this opinion that the 68 individuals will not collectively own more than 50% of the voting securities of [*****] after exercise of the stock options, see 7 Tex. Admin. Code §12.4(b) [now 7 TAC §12.9(c)(1)(B)].

As a practical matter, each loan file should be properly documented to reflect the creditworthiness of the individual borrower and the basis for the Bank's reasonable reliance on the individual borrower as the source of repayment.

Opinion No. 95-24

May 19, 1995

Everette D. Jobe, General Counsel

Your letter dated April 26, 1995, has been referred to me for response. You state that [*****] State Bank (the "Bank") has been approached by a car dealership that would like to obtain a line of credit for $1,000,000 from the Bank and also obtain immediate credit on drafts deposited with the Bank. On any one day the amount of outstanding drafts could be $1,000,000. The Bank's legal lending limit is $1,500,000.

As you describe the circumstances, the Bank's outstanding loans and extensions of credit to the car dealership would, if fully funded, violate the Bank's legal lending limit. While the Department does not consider amounts paid on items in the normal process of collection under Regulation CC (12 CFR Part 229) as loans or extensions of credit [now see 7 TAC §12.3(b)(4)], "car drafts" are generally not submitted through normal collection channels as envisioned by Regulation CC. Immediate credit on uncollected car drafts would therefore be considered an extension of credit by the Bank. Of course, payment by a bank against a dishonored item would also be an extension of credit.

You assert that the exception in Article 342-507(b)(2) of the Texas Banking Code [now Finance Code §34.201(a)(3); also see 7 TAC §12.5(b)] as covering the immediate credit on deposited drafts. That exception addresses a completely different situation. [Finance Code §34.201(a)(3), current text no longer uses the term "draft"] exempts certain secured borrowings from "loans and extensions of credit" as follows:

Indebtedness evidenced by ... drafts drawn against actually existing values and secured by a lien upon goods in transit with shippers' order bills of lading or comparable instruments attached.

The important characteristic of the collateral, "shippers' order bills of lading or comparable instruments," is that the holder of these documents has control of the goods in transit and can obtain possession from the shipper. In the event of default by the borrower, the bank must be in a position to sell the underlying goods or commodities and deliver good title and possession to its purchaser, thus being able to protect itself without extended litigation. Automobiles are generally not "goods in transit" as encompassed by this exception in that they are seldom shipped under a bill of lading.

Opinion No. 95-22

A perfected security interest in a segregated deposit account is necessary to satisfy the exemption from legal lending limits.

April 26, 1995

By letter dated April 7, 1995, you requested the opinion of the Texas Department of Banking regarding whether the plan you propose will result in correction of a legal lending limit violation relating to the "[*****] loans" at the [*****] Bank & Trust. We conclude that the action you propose does not correct the violation.

You indicated the sum of $747,000.00 has been deposited by the directors in the [*****] Bank & Trust, to be governed by the Trust Agreement enclosed with your letter, for the purpose of offsetting the legal lending limit violation on the [*****] loans. You stated the account would not be specifically pledged to the [*****] loans but would be available to purchase the principal, accrued interest, or any charged off portion of the loans. The directors propose this contingent purchase arrangement to avoid negating the potential liability of a former officer or director. The notes to be purchased would not include those with FmHA guaranties to avoid rendering the guaranty invalid.

Unless the account is specifically pledged against the [*****] loans, the arrangement you propose will not correct the violation. Article 342-507(b)(11) of the Texas Banking Code [now Finance Code §34.201(a)(10)] specifically provides that "indebtedness secured by a segregated deposit account in the lending bank" is not subject to the legal lending limit. A perfected security interest in the account is therefore required for the bank to avail itself of this exemption.

Opinion No. 95-17

Loans to related family members need not be aggregated for legal lending purposes under certain circumstances.

March 10, 1995

Everette D. Jobe, General Counsel

We have received your letter dated March 3, 1995, regarding the application of legal lending limit analysis to loans made by [*****] Bank ("Bank") to the [*****] family. This analysis is based on your representations and the assumptions noted, and may be relied on to the extent your representations and our assumptions are correct.

According to your letter:

(1) The Bank currently has loans to [Person A] aggregating $383,500, $355,000 in the form of a revolving draw loan for home improvements and $28,500 in the form of an unsecured loan, although you state that the unsecured loan is "100% participated out to an individual."

(2) The Bank has a loan to [Person A's] son, [Person B], in the amount of $35,100, secured by real estate and guaranteed by [Person A]. You represent that the guarantee of [Person A] was obtained by the Bank out of an abundance of caution and that the Bank is primarily relying on [Person B] for repayment of the loan. You state that [Person B] is employed by a law firm and imply that his salary is sufficient to enable him to qualify for the loan without his father's guaranty. While you are aware that [Person A] has made some of the loan payments due on [Person B's] loan, the Bank still considers the source of repayment to be [Person B's] salary. Further, you state that [Person A] did not receive any benefit from the proceeds of the loan.

(3) The Bank has a loan to [Person A's] daughter, [Person C], in the amount of $17,443.34, guaranteed by [Person A]. You represent that the Bank is primarily relying on [Person C] for repayment of the loan. You state that [Person C] is employed and the Bank made the loan in reliance on her income from that employment to service the loan. The Bank believes all debt service on this loan has been made by [Person C]. While you did not state that [Person A] did not receive any benefit from the proceeds of the loan, I assume that is the case for purposes of this analysis, based on the general tenor of your letter.

Analysis:

Article 342-507(b) of The Texas Banking Code [now Finance Code §34.201(a)] (the "Code") states that "[t]he total loans and extensions of credit by a state bank to a person outstanding at one time may not exceed twenty-five per cent (25%) of its capital and certified surplus."1 You have represented that the Bank's legal lending limit as provided by this calculation is $359,000, which I accept for purposes of this analysis.

Rule 12.4(a) [now see 7 TAC §12.9(a), current text substituted] provides in pertinent part:

(a)  General rule. A loan or extension of credit to one borrower is attributed to another person, and each person will be considered a borrower, if:

     (1)  proceeds of the loan or extension of credit are to be used for the direct benefit of the other person, to the extent of the proceeds so used, as provided by subsection (b) of this section;

     (2)  a common enterprise is deemed to exist between the persons as provided by subsection (c) of this section; or

     (3)  the expected source of repayment for each loan or extension of credit is the same for each person as provided by subsection (d) of this section; or

     (4)  notwithstanding another provision of this section, the banking commissioner determines that a loan should be attributed to another person pursuant to the Finance Code, §34.201(c).

Rule 12.2 [now see 7 TAC §12.9(g), current text substituted] states in pertinent part that:

The derivative obligation of a ... guarantor of a loan or extension of credit ... is not aggregated with direct loans or extensions of credit to such ... guarantor if the lending bank is relying primarily on the creditworthiness of the primary obligor and none of the tests set forth in this section are satisfied.  The reliance of the lending bank on the primary obligor must be evidenced by the certification of an officer of the bank that the bank is, on stated facts, relying primarily on the responsibility and financial condition of the primary obligor for payment of the loan or extension of credit .... In the event that the loan ... experiences subsequent deterioration to the point that the primary obligor is no longer performing in accordance with the terms of the initial loan agreement, such event will not result in a lending limit violation on behalf of the guarantor by virtue of the primary obligor's nonperformance.  However, the total amount of the deteriorated loans ... must be combined with all other obligations of such guarantor in determining whether the guarantor may obtain additional loans or extensions of credit from the bank.

You have represented, with respect to the loan referenced in paragraph (2) above, that the proceeds of the loan were not used for the direct benefit of the guarantor, and I have assumed the same to be the case for the loan referenced in paragraph (3) above. You have further represented that the expected source of repayment for each loan is the primary obligor on the note. I also assume that evidence exists in the Bank's files, with respect to each loan referenced in paragraphs (2) and (3) above, to reasonably support the determination that the primary obligor has the ability and capacity to repay the loan, that the decision to fund the loan was based on that determination, and that an officer's certificate in satisfaction of the quoted requirements of [7 TAC §12.9(g)] is in each loan file.

Based on your representations and the assumptions made above, I conclude that the loans to [Person B], [Person A], and [Person C] need not be aggregated for purposes of applying the lending limitations of [Finance Code §34.201]. This letter does not address the potential applicability of 12 USC §371c and Regulation O (12 CFR Part 215).

Opinion No. 95-16

A bank may not recover costs related to compliance with a criminal subpoena for customer records.

April 26, 1995

Everette D. Jobe, General Counsel

By letter dated March 10, 1995, you requested our interpretation of Article 342-705, Texas Banking Code [now Finance Code §59.006]; specifically, its application to criminal subpoenas. As we discussed by telephone several weeks ago, [Finance Code §59.006] has no application to criminal subpoenas and the bank may not recover its costs from the district attorney under the authority of any laws administered by the Texas Department of Banking.1

You contend that [Finance Code §59.006] clearly states that the article applies to civil law matters and not to criminal investigations, and for that reason cannot be construed as authority for a county to receive documents pertaining to a criminal matter or investigation without incurring costs. The criminal subpoena is not issued under this article and is therefore not subject to either its protections for customer records or its provisions for recovery of costs.

In addition, you feel that Article 35.27, §3, Texas Code of Criminal Procedure, authorizes reimbursement of non-resident witnesses for their unspecified expenses in criminal matters. As this provision of law is not administered by the Texas Department of Banking, we cannot issue an interpretation that would be persuasive. I do note that reimbursement of expenses other than transportation, meals, and lodging is authorized under this section only upon application by the state's attorney.

Opinion No. 95-15

Mobile branch banking is an authorized activity for a Texas-chartered state bank if each branch has been approved as such with a specific service or marketing area, and logs are maintained by the mobile branch to track the specific locations in which the mobile unit is conducting business.

March 13, 1995

Everette D. Jobe, General Counsel

By letter dated March 6, 1995, you requested advice regarding what avenues are available to you to provide a convenient receptacle for deposits in neighboring communities, stating that you would like to drive to a designated location in each community, receive deposits, and return to the bank. You are requesting how to establish a messenger or courier service operated by the bank. Because Texas law does not specifically require a branch to have a fixed or permanent location, the Texas Department of Banking has previously issued opinions confirming the treatment of a mobile messenger service for picking up deposits as a mobile branch.

If a messenger service is operated by a [licensed] third party, the courier activities do not constitute branching [see Finance Code §31.002(a)(8)(E)]. Whether a messenger service is established by a third party is based on a case-by-case review of all of the circumstances, except that a messenger service is clearly established by a third party if a party other than the bank owns the service and its facilities (or rents them from another party other than the bank) and employs the persons engaged in the provision of the service, and the messenger service:

(1)  Makes its services available to the public, including other depository institutions;

(2)  Retains ultimate discretion to determine which customers and geographical areas it will serve;

(3)  Maintains ultimate responsibility for scheduling, movement, and routing;

(4)  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;

(5)  Assumes responsibility for the items during transit and maintains adequate insurance covering holdups, employee fidelity, and other in-transit losses; and

(6)  Enters into contracts with customers which provide that the messenger service acts as the agent for the customer when the items are in transit between the bank and the customer and, in the case of items intended for deposit, the items are not considered to have been deposited until delivered to the bank at an established bank office, and, in the case of items representing withdrawals, the items are considered to be paid when the item is given to the messenger service.

Third party messenger services are generally most useful when dealing with large, commercial customers. The activity you wish to conduct would likely have to be performed by the bank itself. A messenger service operated by a state bank would have to be approved as a branch and be operated within the State of Texas. Although a mobile branch bank is not required to have a fixed, identifiable location, each mobile branch must have an identifiable service or marketing area. While the state bank would not have to identify the specific sites where its mobile unit would stop, each mobile branch is required to maintain logs indicating the specific locations in which the mobile unit is operating in order to track branch activities.

In summary, mobile branch banking is an authorized activity for state banks in Texas if each branch has been approved as such with a specific service or marketing area, and logs are maintained by the mobile branch to track the specific locations in which the mobile unit is conducting business.

Opinion No. 95-11

A jointly administered loan program between a bank and mortgage company is not a "warehouse facility" for the mortgage company and loans are therefore not aggregated for legal lending limit purposes.

September 18, 1995

Everette D. Jobe, General Counsel

This letter is written in response to your letter to John Vaught dated January 12, 1995.

You inquired whether the "Construction to Permanent Loan" program [*****] Bank (the "Bank") administers jointly with [*****] Mortgage Company ("Mortgage") could be deemed a warehouse facility for Mortgage. We conclude not. Through a single application process, an applicant applies for construction financing through the Bank and a permanent loan through Mortgage. The Bank and Mortgage each evaluate the application under separate lending guidelines, and each funds its portion of the program based on an independent evaluation of the borrower's creditworthiness. The primary linkage between the Bank and Mortgage is that both loans must be approved or neither is approved, and contractual provisions simplify cooperation between the Bank and Mortgage regarding the process of closing into permanent financing. Under these circumstances, the Department considers the Bank's borrower to be the consumer and not Mortgage. The Bank is of course expected to apply prudent underwriting standards consistent with safe and sound banking practices.

This opinion is limited to the facts as you presented them to us, and any change in facts may compel a different conclusion. Please feel free to call me if you have any questions or comments.

Opinion No. 95-8

The amount of outstanding certified checks on behalf of an entity constitutes a loan to the entity for legal lending limit purposes.

September 18, 1995

Everette D. Jobe, General Counsel

This letter is written in response to your letters dated December 14, 1994, February 27, 1995, and March 6, 1995, and a letter from your attorney dated April 19, 1995, regarding the proposed Immediately Available Funds Procedure Agreement ("Agreement") among [*****] State Bank ("Bank"), [*****] Mortgage Corp. ("Mortgage Company"), and a third party title company ("Title Company"). Please accept my apology for the lengthy delay in responding to your letter.

The Agreement provides a mechanism for satisfying Mortgage Company's obligation to deliver "good funds" to the title insurance agent conducting a real estate mortgage loan closing on behalf of Mortgage Company, pursuant to Article 9.39A, Texas Insurance Code, by providing for telephone "certification" of Mortgage Company's check by the Bank. The Agreement provides for procedures to verify the check as well as amounts on deposit at the Bank and available to satisfy the check. The Bank primarily sought our views because Mortgage Company is a related party to the Bank. [Person A] is chairman of the board of the Bank and [Person B] is vice chairman. [Person B] is also president of Mortgage Company and both [Person B] and [Person A] have direct or indirect ownership interests in Mortgage Company. The Bank has not provided information regarding the extent of common ownership between the Bank and Mortgage Company; however, based on our conclusions, that information may be unnecessary.

The Bank clearly has the power to certify checks drawn upon it, including by a specified telephone procedure. However, we conclude that the amount of outstanding certified checks on behalf of Mortgage Company is a loan or extension of credit by the Bank to Mortgage Company and is subject either to legal lending limit analysis under the Texas Banking Act, §5.201 [now Finance Code §34.201], or transaction limits with affiliates under 12 USC §371c, commonly called "23A" (see Texas Banking Act, §5.201(a)(13) [now Finance Code §34.201(a)(13)]), unless funds sufficient to satisfy the checks are withdrawn from the account and transferred to the Bank immediately upon certification.

This opinion is limited to the facts as you presented them to us, and any change in facts may compel a different conclusion.

Opinion No. 94-79

A state bank may finance trade receivables but, as structured, the receivables are subject to aggregation for legal lending limit purposes.

February 2, 1995

Brian R. Herrick, Assistant General Counsel

Pursuant to your request for an opinion as to whether it is permissible for a state-chartered bank to purchase trade receivables at a discount, we have reviewed your letter, dated November 2, 1994, and the authorities cited therein, as well as others, and have come to the conclusion that the activity in question is permissible. In our opinion, however, the substance of the transaction you described is not the purchase of trade receivables, but the financing of those receivables by the bank. In any event, the bank may purchase discounted receivables subject to the restrictions outlined herein below and any other constraints in accordance with applicable law.

Facts

The transaction about which you have inquired involves the purchase of the receivables of a commercial business (the "Company") at a discount with full recourse on the seller. The bank would purchase certain of the Company's receivables, which represent amounts owed the Company by its own customers. The bank would bill the obligor directly for each receivable and collect and retain the amount paid by the obligor. In the event an obligor were to default in the payment of all or a portion of the receivable, the bank would have the right to require that the Company repurchase the receivable. In addition, if the Company were to default in someway in its arrangement with the bank, then the bank could require that the Company repurchase all of the receivables. The bank would require that the Company establish a reserve to secure the Company's repurchase obligations. The reserve would be established via a segregated account at the bank. The balance maintained in the reserve account would be at least ten percent of the aggregate balance of outstanding receivables.

The bank will provide data processing services (e.g., tracking payments, calculating and posting accruals, maintaining billing histories, etc.), credit and receivable forms, and billing services for current accounts (i.e., accounts receivable that have not been repurchased by the Company) presumably in exchange for a fee. The bank will contract with [*****], Inc., to provide the billing and information services. The bank will pass on the fee charged by [*****], Inc., for its services to the Company. The bank will not attempt to collect delinquent receivables from the obligor.

Application and Interpretation of Laws and Regulations

The powers of a state-chartered bank are set forth in article 342-302 of the Texas Banking Code, Tex. Rev. Civ. Stat. Ann. arts. 342-101 et seq. [now Finance Code §32.001]. Article 342-302(a) [now Finance Code §32.001(b)(1)] provides, inter alia, that a bank may "lend money with or without security at interest . . . and to buy, sell and discount . . . evidences of indebtedness." In addition, article 342-302(e) [now Finance Code §32.001(b)(1)] empowers a bank "[t]o purchase, invest in, and sell . . . evidences of indebtedness, and to lend money and to charge and collect interest thereon in advance or otherwise." [Finance Code §32.001(b)(1)] also provides that a bank has all incidental powers necessary to exercise its specific powers.

We agree that a bank could purchase receivables at a discount and the receivables in question would be permissible investments for a state-chartered bank. Furthermore, the Finance Commission previously authorized the purchase of open accounts in 7 TAC §11.81. We do not believe, however, that the transaction you described involves the purchase of the receivables. It seems clear that the bank would merely be providing the Company with a line of credit with which to fund its receivables. No true purchase of the receivables appears to be intended or effected.

The bank would treat the relationship as if it were a line of credit, the expected source of repayment of which would be the money generated from the receivables. The bank would book the "purchase" as a demand note and apply receivable payments towards repayment of advances under the line of credit. In the event a particular receivable were to go into default, no attempt would be made by the bank to collect the note. On the contrary, the bank would return the receivable to the Company and charge the Company's reserve account for the full face amount of the receivable, less any principal payments, plus applicable finance charges.

Another aspect of this proposal that leads us to conclude it is not a purchase of receivables is the fee arrangement with respect to bookkeeping and data processing services performed in connection with the transaction. If the bank is truly purchasing the receivables, why then would the Company be responsible for reimbursing the bank for expenses related to processing, billing, and tracking, and related expenses, all of which ordinarily would be paid by the owner of the receivables? Moreover, the bank does not engage in any collection activities whatsoever. It simply returns the defaulted receivable to the Company in exchange for the full amount of the outstanding principal.

The billing and accounting services provided by the bank pursuant to its arrangement with the Company would be viewed by the Department as incidental to its lending arrangement with the Company. Consequently, those services would be permissible as an exercise of incidental powers by the bank pursuant to [Finance Code §32.001].

As I am sure you are aware, there is a potential usury problem associated with these transactions that may arise if for usury purposes "interest" paid by the Company is aggregated with finance charges assessed the underlying obligor. That potential problem should be examined and researched very carefully by the bank. The bank should consult with its counsel as to what would be most prudent with respect to further research of those issues. Perhaps, you should consider contacting someone with the Office of Consumer Credit Commissioner and solicit their opinion on this issue.

Although you have not asked for an opinion as to whether the individual receivables would be aggregated for legal lending limit purposes, our initial reaction is that they would. Because the transaction amounts to a financing of the receivables by the bank rather than an outright purchase, the transaction would give rise to an extension of credit under article 342-507 [now Finance Code §34.201]. Even if the bank were to successfully argue that the transaction amounted to an outright sale of the receivables to the bank by the Company, the Company's repurchase obligation (among other aspects of the transaction), most likely, would require that all of the receivables be aggregated for purposes of legal lending limit analysis. That is not to say, however, that no exception to the general rule of [Finance Code §34.201(a)] would apply. If this issue concerns you, or you would like us to give further consideration to this aspect of the transaction, please make an additional request, in writing.

In summary, the transaction you described appears to be permissible, although we do not agree with your characterization of the transaction as a purchase of the receivables by the bank. In addition, the services provided by the bank incidental to the financing of the receivables, would be viewed by the Department as an exercise of the bank's incidental powers under [Finance Code §32.001(b)(1)], and, hence, would be permissible. The Department expresses no opinion as to whether this would be an appropriate avenue of business for any particular bank. A bank embarking on a loan or purchase arrangement of this type should make certain that its officers have adequate experience and expertise in matters of this type. Other safety and soundness concerns that may result from such loans or investments, e.g., unsafe concentrations of credit or usury, should be examined before the bank pursues a program of this type.

This opinion is limited to the facts and circumstances set forth in your letter dated November 2, 1994, and any facts or assumptions set forth herein, any change in those facts, circumstances, assumptions, or the parties to the transaction, may result in a different opinion.

Opinion No. 94-75

If the source of repayment is the same for all borrowers, 100% of the balance of the note due will be attributed to each borrower for legal lending limit purposes.

February 14, 1995

Brian R. Herrick, Assistant General Counsel

Pursuant to your request, we have reviewed the loan documents submitted with your request and have analyzed the facts of the transaction, as outlined in your letter, and we have come to the conclusion that the amount of the loan to be attributed to [Person A] for legal lending limit purposes would be the entire principal balance of the Note (hereinafter defined).

Facts

The facts of the transaction, as presented by you and set forth in the documents you provided, are as follows. On January 21, 1994, [*****] Bank (the "Bank") loaned [Person A], [Person B], and [*****] Ranches (a partnership composed of [Person C] and [Person D]) the sum of $1,972,500 to purchase 2,005 acres of real property located along Highway [*****] in [*****] County, Texas. Under the terms of the purchase agreement among the borrowers, the borrowers hold title to the property as tenants in common. [Person A] holds an undivided 75% interest in the real property. You have represented that, at the time the loan was made, the Bank had agreed to limit the liability of [Person A] under the Real Estate Lien Note (the "Note") to a percentage of the outstanding balance equal to his ownership interest in the land, i.e., 75%. The Bank's attorney, however, mistakenly drew up the Note to provide that each of the makers was jointly and severally liable for the entire balance of the Note. [Person A] also executed a guaranty agreement whereby he personally guaranteed $1,578,000 or 80%, of the outstanding principal balance of the Note, plus any and all accrued interest.

In October, 1994, when the error in the Note was discovered, the Bank and borrowers entered into an agreement amending the terms of the Note to limit liability of the borrowers under the Note to an amount equal to their respective ownership interests in the property. Although we do not believe it affects the outcome of our analysis, we have assumed the agreement to amend the note accomplished its purported effect.

Issue

The question is whether, for legal lending limit purposes, 75%, 80%, or 100% of the principal balance of the Note should be attributed to [Person A].

Discussion

Under the terms of the Note, as originally written, the entire balance of the Note would be attributed to [Person A] for legal lending limit purposes. Article 342-507(a)(1) of the Texas Banking Code [now Finance Code §31.002(a)(34)] includes within the definition of the phrase "loans and extensions of credit" all advances of funds to a person, direct or indirect, "that are made on the basis of an obligation of the person to repay the funds." The facts of the transaction, however, make it clear that the Bank did not intend that [Person A] be obligated for the entire principal balance of the Note. Therefore, assuming the amendment of the Note is effective, [Person A's] direct obligation on the Note would be 75% of its face amount.

The question still remains whether, for legal lending limit purposes, the amount to be attributed to [Person A] will be (i) 75% of the outstanding principal balance (his direct obligation under the terms of the Note, as amended), (ii) the lesser of $1,578,000 or the outstanding principal amount of the Note, which is the obligation of [Person A] under his personal guaranty, or (iii) the entire outstanding principal balance of the Note. Under the Department of Banking's rules, the phrase "loans and extensions of credit," as defined in [Finance Code §31.002(a)(34)], does "not include the liability of a . . . guarantor who does not receive any direct benefit from the loan or extension of credit." See 7 Tex. Admin. Code §12.2 [now 7 TAC §12.9(g)]. Clearly, [Person A] has directly benefitted from this loan. Therefore, the amount of the loan guaranteed by [Person A] should be attributed to him for legal lending limit purposes. Consequently, for legal lending limit purposes, at the very least, $1,578,000 of the outstanding principal balance of the Note will be attributed to [Person A].

Pursuant to 7 Tex. Admin. Code §12.4(a)(2) [now 7 TAC §12.9(d)], a loan or extension of credit to one person will be attributed to other persons for purposes of Article 342-507 [now Finance Code §34.201] when the expected source of repayment for each loan or extension of credit is the same for each person. In this instance, the expected source of repayment is the cash flow from the development and sale of the collateral. That source of repayment is the same for all three borrowers. As a result, the source of repayment test set forth in [7 TAC §12.9(d)] has been met. Therefore, the amount to be attributed to each of the borrowers, for purposes of [Finance Code §34.201(a)], is $1,972,500, which is the entire principal balance of the Note.

We have not addressed the question as to whether facts surrounding the loan in question would trigger the attribution rule of 7 Tex. Admin Code §12.4(a)(1) [now 7 TAC §12.9(b)] under the direct benefit test. It is not necessary to discuss that issue, because the source of repayment test has been met. You should keep in mind, however, that an argument for attribution could be made under [7 TAC §12.9(b)], as well.

This opinion is limited to the facts and circumstances set forth in your letter, dated November 2, 1994, and facsimile transmission, dated February 1, 1995, and any facts or assumptions set forth herein. Any change in those facts, circumstances, assumptions, or the parties to the transaction may result in a different opinion.

Opinion No. 94-64

A properly structured loan arising from the discount of negotiable and non-negotiable installment consumer paper is considered to be comprised of separate loans to the underlying consumers for legal lending limit purposes.

October 25, 1994

Brian R. Herrick, Assistant General Counsel

Pursuant to your letter, I have reviewed your request for an opinion regarding the applicability of the legal lending limit statute, Tex. Rev. Civ. Stat. Ann. art. 342-507 [now Finance Code §34.201], to certain loans proposed to be made by your client, a state-chartered bank (the "Bank"). I have come to the conclusion that although the loan purchase transaction is subject to [Finance Code §34.201], if properly structured, it could be excepted under Tex. Rev. Civ. Stat. art. 342-507(b)(12) [now Finance Code §34.201(a)(11); also see 7 TAC §12.6(h)].

Facts

A. Existing Debt. The Bank has an existing loan to a company (the "Company"), which operates a resort hotel and conference center. This existing loan is secured by a first lien on the Company's assets and is guaranteed by the Company's three owners. The Company has made application to the Bank for financing in three other transactions.

B. Interim Construction Loan. The Company has requested financing from the Bank for an interim construction loan, which would be used to construct a 12-unit condominium project in which the Company contemplates selling time-share units. This loan would be secured by a first lien on the building and all improvements, furniture, and fixtures of the units. Collateral securing the existing debt would be cross-pledged to further secure this proposed credit.

C. Discount of Installment Consumer Paper. In connection with the development of the condominium project, the Company also has inquired whether the Bank would purchase the individual time-share contract-for-deed notes. Before it obligates itself to purchase the notes, the Bank will review each note to ensure that (i) each maker meets the Bank's credit criteria, (ii) a cash down payment of 20 percent has been made against the purchase price, and (iii) the note does not exceed a five to seven year amortization. The Bank also will require that the notes be endorsed with full recourse against the Company. The Bank anticipates requiring a cross-pledge of existing collateral from the Company to secure the Company's recourse obligation on the purchase of the contract-for-deed notes. In addition, the Company will deposit funds with the Bank as a reserve to repurchase loans in default.

D. Guidance Line of Credit. The Company also has requested the Bank extend it a "guidance" line of credit to provide funding for contract-for-deed notes that do not meet the above purchase criteria and, therefore, could not be purchased by the Bank. This line of credit would be secured by collateral assignments of the original contract-for-deed notes and accompanying security agreements, together with the cross-pledge of all existing collateral.

Application and Interpretation of Laws and Regulations

The total loans and extensions of credit outstanding at any one time by a state bank to a person may not exceed 25 percent of the bank's capital and certified surplus. [Finance Code §34.201(a)]. The term "loans and extensions of credit" is defined in article 342-507(a)(1) [now Finance Code §31.002(a)(34)] as "advances of funds to a person that are made on the basis of an obligation of the person to repay the funds or that are repayable from specific property pledged by or on behalf of the person." Obviously, the Company, whether operated as a corporation, partnership, or joint venture, would be considered a person for purposes of [Finance Code §31.002(a)(34)]. The recourse obligation of the Company would be "an obligation . . . to repay the funds" advanced in connection with the purchase. Therefore, absent a specific exclusion, an extension of credit from the Bank to the Company resulting from the purchase by the Bank of the contract-for-deed notes would be subject to the legal lending limit set forth in [Finance Code §34.201(a)].

Certain classes of loans or extensions of credit, however, are excluded from the limitation on total loans and extensions of credit to a single borrower. Pursuant to [Finance Code §34.201(a)(11), current text substituted], the legal lending limit does not apply to any portion of any:

(11)  loans and extensions of credit arising from the purchase of negotiable or nonnegotiable installment consumer paper that carries a full recourse endorsement or unconditional guarantee by the person transferring the paper if:

(A)  the bank's files or the knowledge of its officers of the financial condition of each maker of the consumer paper is reasonably adequate; and

(B)  an officer of the bank designated for that purpose by the board certifies in writing that the bank is relying primarily on the responsibility of each maker for payment of the loans or extensions of credit and not on a full or partial recourse endorsement or guarantee by the transferor; ....

Any loan or extension or credit that satisfies the above-stated criteria will not be considered a loan to the transferor for purposes of determining compliance with a bank's legal lending limit. This exception is further explained in rules promulgated by the Banking Department. See 7 Tex. Admin. Code 12.5 [now 7 TAC §12.6(h)].

The term "installment consumer paper" is defined as including paper relating to "residences . . . and similar consumer items". [7 TAC §12.6(h)(3)]. This has been interpreted by the Department as covering purchase money mortgage loans, home improvement loans, and home construction loans, if to the ultimate owner and not to a builder-developer. I am of the opinion that the term "residences" would include paper relating to a contract-for-deed note for the purchase of a time-share unit in a condominium.

Under the Department of Banking's rules, a loan or extension of credit "arising from the discount of negotiable or non-negotiable installment consumer paper and which carries a full recourse endorsement . . . will be treated as a loan or extension of credit to the person transferring the paper and will be subject to the general lending limitation of 25 percent . . . unless the provisions of [Finance Code §34.201(a)(11); also see 7 TAC §12.6(h)] are met."  [7 TAC §12.6(h)] provides that loans and extensions of credit that meet the requirements of [Finance Code §34.201(a)(11)] are treated as loans or extensions of credit to the maker of the paper even though the bank has recourse against the seller. In order to meet the requirements of [Finance Code §34.201(a)(11)], "the bank's files or the knowledge of its officers of the financial condition of each maker of the consumer paper must be reasonably adequate . . . [and a designated] officer of the bank . . . must certify in writing" that the bank's reliance on the maker for repayment is primary. Consequently, in order for a bank to rely on [Finance Code §34.201(a)(11)], the bank must make an independent decision as to the creditworthiness of the maker of each loan. The certification and the information required under [Finance Code §34.201(a)(11)] and [7 TAC §12.6(h)] concerning the financial wherewithal of the maker "must be in such form as is appropriate for the class and quantity of the paper involved." Id.

In your letter, you indicated the Bank will satisfy the conditions set forth in [7 TAC §12.6(h)]. Furthermore, you have represented that the Bank's application and underwriting process, the Bank's files, and the knowledge of the Bank's officers of the financial condition of each maker will be reasonably adequate to meet these requirements. The Bank's board of directors will designate an officer for purposes of making the required certification, and that officer will certify that the Bank is relying primarily on the responsibility of each maker for repayment of the loans and not on the recourse obligation of the transferor. Based upon these representations, I am of the opinion that [Finance Code §34.201(a)(11)] is applicable to the transactions involving the purchase of the contract-for-deed notes.

Additionally, the existence of the cross-collateralization provisions contemplated by the Bank as additional protection in the event the primary obligor (i.e., the maker of the paper) defaults would not, in and of itself, require aggregation or trigger the attribution rules under [Finance Code §34.201(c)] or 7 TAC §§12.1 et seq. [specifically, 7 TAC §12.9].

You also have requested that I confirm that the Bank's in-house commitment to purchase up to a specified amount of the contract-for-deed notes would not be considered an "obligation to advance funds" as that phrase is defined in 7 TAC §12.2 [now 7 TAC §12.3(a)(2)]. It is my understanding that this commitment is purely internal and not the subject of any written agreement or commitment between the Bank and the Company. The Bank will not be obligated, under any circumstances, to purchase notes from the Company up to this amount. In fact, there will be no binding commitment to advance funds to the Company at a future date for such purposes. Based on the foregoing information, I am of the opinion that this in-house commitment would not be viewed as a "binding commitment to advance funds" such that it would come within the definition of the phrase "obligation to advance funds" as that phrase is defined in [7 TAC §12.3(a)(2)].

You have not asked whether the legal lending limit would apply to the interim construction loan or the "guidance" line of credit the Bank intends on extending to the Company. In my opinion, both the interim construction loan and the "guidance" line of credit would be aggregated with the Company's existing credits for purposes of legal lending limit analysis.

This opinion is limited to the facts and circumstances set forth in your letter, dated September 28, 1994, and any facts or assumptions set forth herein. Any change in those facts, circumstances, assumptions, or the parties to the transaction may result in a different opinion.

Opinion No. 94-60

Loans guaranteed by the Export-Import Bank under its Medium-Term Export Guarantee Program are exempt from legal lending limits.

January 5, 1995

Brian R. Herrick, Assistant General Counsel

In accordance with your request, I have reviewed the materials you provided regarding loans guaranteed by the Export-Import Bank of the United States (the "Eximbank") under its medium-term export guarantee program and researched the issue as to whether such loans would be excepted from the legal lending limit restrictions under subsection (b)(8) of Tex. Rev. Civ. Stat. Ann. art. 342-507 [now Finance Code §34.201(a)(8)]. We have come to the conclusion that the exception would apply. Therefore, any loan guaranteed under that program would not be subject to the single borrower lending restrictions of [Finance Code §34.201(a)].

The total loans and extensions of credit outstanding at any one time by a state bank to a person may not exceed 25% of the bank's capital and certified surplus.1 The term "loans and extensions of credit" is defined in article 342-507(a)(1) [now Finance Code §31.002(a)(34)] as "advances of funds to a person that are made on the basis of an obligation of the person to repay the funds or that are repayable from specific property pledged by or on behalf of the person." Clearly, the exporter borrowing the funds is considered a person for purposes of [Finance Code §31.002(a)(34)]. Therefore, absent a specific exclusion, loans from a state-chartered bank to an exporter guaranteed by the Eximbank would be subject to the legal lending limit set forth in [Finance Code §34.201(a)].

As you are aware, certain classes of loans or obligations are excluded from the limitation on total loans and extensions of credit to a single borrower. Pursuant to [Finance Code §34.201(a)(8)], the legal lending limit does not apply to any portion of any indebtedness "unconditionally guaranteed" as to payment of both principal and interest by the United States government, or an agency or instrumentality thereof.2 In this case, the loans will be directly guaranteed by the Eximbank.

The Eximbank is an independent corporate agency of the United States empowered to provide guarantees, insurance, and extensions of credit to aid in the financing of imports and exports. 12 USC §635(b)(1)(A). Contractual liabilities of the Eximbank incurred pursuant to the authority of its governing statute, 12 USC §635, constitute full faith and credit obligations of the United States. 42 Op. Att'y Gen. 327 (1966).

As I understand it, the medium-term guarantee program provides a 100% guarantee of principal and interest on loans from banks to exporters for export financing purposes. The written guarantee agreement between the Eximbank and the lending bank specifically details the bank's obligations and responsibilities, which must be fulfilled in order to ensure payment under the guarantee. The existence of such conditions under a guarantee arrangement does not necessarily mean the guarantee would be treated as conditional for purposes of [Finance Code §34.201(a)(8), also see 7 TAC §12.6(f)]. Guarantee programs of this type generally require that the lender institute certain prudent and customary practices in the making, servicing, and collecting of the loan for the guarantee to be effective. Even with conditions such as these, the guarantee is often viewed as being unconditional for legal lending limit purposes. A guarantee has been interpreted by the Department to be "unconditional" if the protection afforded the bank under the terms of the guarantee is not substantially impaired or diminished in the case of a loss resulting from factors beyond the bank's control. Protection against loss is not considered to be materially diminished or impaired due to procedural requirements in the guarantee agreement within the bank's control, such as a requirement that notification of default be given within a specific period of time after its occurrence, or a requirement of good faith or diligence on the part of the bank in making, servicing, or collecting the loan. This is consistent with the position taken by the Office of the Comptroller of the Currency regarding this issue as it affects national banks. See 12 CFR §32.6(e)(4).

We will treat loans guaranteed by the Eximbank under its medium-term export guarantee program as being unconditionally guaranteed for purposes of [Finance Code §34.201(a)(8)], because the protection afforded the bank under the guarantee is consistent with our interpretation of an unconditional guarantee under [Finance Code §34.201(a)(8), also see 7 TAC §12.6(f)]. Thus, the portion of a bank's loans to an exporter guaranteed by the Eximbank under the medium-term export guarantee program would not be limited by [Finance Code §34.201(a)]. That is not to say these would be appropriate investments for every bank. Safety and soundness concerns that may result from such an investment, e.g., unsafe concentrations of credit, should be examined before any investment is made in an amount approaching the limits set forth in [Finance Code §34.201(a)], even if all or a portion of the investment is not subject to those limitations.

This opinion is limited to the facts and circumstances set forth in your letter, dated July 21, 1994, and any facts or assumptions set forth herein. Any change in those facts, circumstances, assumptions, or the parties to the transaction may result in a different opinion.

Opinion No. 94-43

Acquisition loans for a controlling interest, made to employee ownership plans but not to individual borrowers, must be aggregated for legal lending limit purposes.

September 26, 1994

Everette D. Jobe, General Counsel

By letter dated August 23rd, you requested our views regarding application of legal lending limit analysis to certain loans secured by and purchases of stock in [*****] Loan & Building Association (the "Association"), in connection with the conversion of the Association from a mutual to a stock association. This letter will confirm our telephone conversations in which we resolved your concerns prior to the anticipated closing on September 23, 1994.

You stated that the [*****] State Bank (the "Bank") had committed to loan $1,270,000 to the Association's Employee Stock Option Plan ("ESOP") and Recognition and Retention Plan Trust ("RRPT") for the purchase of Association stock. The Bank also anticipated loan applications from individuals in the community for the purpose of purchasing Association stock. By telephone, you further stated that the Bank will be looking to individual borrowers for repayment of any stock loans, although the stock will be held by the Bank as collateral, and all borrowers of stock loans will collectively own less than 50 percent of the Association, thereby avoiding the aggregation rule of 12 TAC §12.4(b) [now 7 TAC §12.9(c)(1)(B)], and are not otherwise related as described in 7 TAC §4(c) and (d) [now 7 TAC §12.9(e) and (f)].

Finally, you indicated that [*****], Inc., the Bank's parent bank holding company, intended to purchase up to 40,000 shares of Association stock for its own account at a price of $10.00 per share. However, in our view, the outright purchase of Association stock by the Bank's holding company should not be considered part of the legal lending limit analysis unless the bank holding company is also borrowing from the Bank to acquire the funds for investment.

We conclude that loans to the ESOP and RRPT, as Association employee compensation devices, should be aggregated, but that loans to the ESOP, the RRPT, and individual borrowers should not be aggregated for legal lending limit purposes unless the total amount of stock owned by these borrowers after the transaction will comprise over 50% of the Association's outstanding stock, which you have represented is not the case.

For purposes of this opinion, we assume as you have represented that individual borrowers of loans to acquire Association stock will not be related to each other in such a manner to invite aggregation of their loans pursuant to [7 TAC §12.9(e) and (f)].

Opinion No. 94-19

Although a state bank generally can sell loan participations to a buyer other than a banking organization, such sales raise material safety and soundness concerns.

May 26, 1994

Everette D. Jobe, General Counsel

You ask whether a state bank can sell loan participations to a buyer other than a banking organization. In general, the answer is yes. However, while no law or regulation prohibits the sale of a loan participation to an individual or company which is not a financial institution, the Department discourages such sales based on safety and soundness concerns.

A loan participation may be considered a security under state and federal law. A bank therefore must assure itself that an exemption is available from securities law registration requirements, and be aware of its obligation to provide full and fair disclosure of all information material to an investment decision. These "security" considerations lead to two problems.

First, individuals and private companies may tend to place undue reliance upon the decision of the bank to grant the loan and conclude that the investment is a quality, collectible credit, even in the face of disclosures and contractual stipulations providing that the bank makes no guarantee as to the credit quality or collectibility of the loan. A loss could result in an image problem for the bank in the community.

Second, the bank would have to disclose potentially sensitive financial information on the borrower that otherwise may not be available to the individual or company. The bank could have liability exposure to the borrower if information disclosed to the individual or company buying the participation is used by the buyer as a basis to harm the borrower, e.g., denial of goods or services from the buyer to the borrower that are essential for the borrower's business.

The preceding discussion is not intended to be exhaustive but serves only as a reminder of the significant business risks inherent in a transaction of the type you describe. The Department strongly encourages you to sell loan participations only to those companies that are in the business of lending as part of their normal business operations.

Opinion No. 94-17

A state bank may use an assumed name under certain circumstances.

July 12, 1994

Everette D. Jobe, General Counsel

By letter dated June 10, 1994, as a supplement to your letter dated April 22, 1994, you requested our views regarding the use of the assumed name "[*****] Mortgage" by the Bank to identify its mortgage banking business at a location other than the Bank's domicile or an approved branch facility. You previously stated that no Bank lending or depository services would be available at the offices of [*****] Mortgage, and your recent letter clarified that the services offered at the offices of [*****] Mortgage would be limited to and comply in all respects with the requirements of 7 TAC §3.93 (repealed), our rule regarding loan production offices. You state that the statements regarding lending practices at the proposed facility contained in your letter dated May 13, 1994 were based on erroneous information.

By telephone conversation on July 12th, you clarified how the assumed name would be used. The assumed name will be used on signage, brochures and other advertising as a marketing tool and to discourage Bank customers from attempting to deposit funds at the [*****] Mortgage facility. All loan documentation, including the application, will refer solely to the Bank and not to [*****] Mortgage.

Based on your representations, in our view the Bank may use the assumed name "[*****] Mortgage" for the facility as proposed. As you noted, prior notice of intent to establish a loan production office is required under 7 TAC §3.93 [now 7 TAC §3.91], although our position is that the 60 day waiting period may be waived upon request if we have no regulatory concerns.

A loan production office must be operated in compliance with [7 TAC §3.91], and the Bank may expect the Department to verify compliance by appropriate examination procedures. As to the use of an assumed name, the Bank is expected to comply with Tex. Bus. & Com. Code §§36.01 et seq., the Assumed Business and Professional Name Act.

Opinion No. 94-15

Corporate loans may be attributed to guaranteeing shareholders for legal lending limit purposes, and partnership loans will usually be attributed to partners.

May 10, 1994

Brian R. Herrick, Assistant General Counsel

I have reviewed your letter, dated April 15, 1994, wherein you requested a legal lending limit opinion regarding the aggregation rules under Article 342-507 of the Texas Banking Code [now Finance Code §34.201], Tex. Rev. Civ. Stat. Ann arts. 342-101 et seq. (the "Banking Code") [now Finance Code, Title 3, Subtitle A], and have determined that the loans to the corporation would be aggregated with the loans to its principal shareholders, for the reasons set forth below. The loan to the partnership also would be attributed to and aggregated with other loans to the individual partners.

The facts, as you have described them to me are as follows. The Bank has a $700,000 outstanding interim construction loan commitment to [*****] Properties, Inc. (the "Corporation"). The Corporation is owned equally by [Person A] and [Person B]. The funds will be used to construct an office building, which will be leased to [*****], Inc.(the "Lessee"). The Bank also has committed to lend the Corporation funds for a permanent loan with a ten-year term with respect to the same building. The Bank maintains financial information on the Lessee and has relied principally on the Lessee's financial stability and strength in making its credit decision. The Bank has taken as collateral an assignment of the ten-year lease between the Corporation and Lessee. Both [Person A] and [Person B] have personally guaranteed repayment of the Corporation's debt. I have assumed that neither [Person A] nor [Person B] owns or has an interest in the Lessee, directly or indirectly.

[Person A], who owns 50% of the stock of the Corporation, has approached the Bank with a request for a $250,000 loan to a general partnership, [*****] (the "Partnership"), in which he owns a 50% interest. The Partnership operates a wholesale nursery business. Because of the nature of the loan to the Partnership, however, the Bank will be relying primarily on the financial strength and creditworthiness of [Person A]. [Person B] owns no interest in the Partnership.

As you are aware, the total loans and extensions of credit outstanding at any one time by a state bank to a person may not exceed 25% of the bank's capital and certified surplus. The term "loans and extensions of credit" is defined in Article 342-507(a)(1) [now Finance Code §31.002(a)(34)] as "advances of funds to a person that are made on the basis of an obligation of the person to repay the funds or that are repayable from specific property pledged by or on behalf of the person . . ." [Person A], the Corporation, and the Partnership would all be persons, as that term is used in [Finance Code §31.002(a)(34)].

Under 7 TAC §12.4 [now 7 TAC §12.9(a)], loans to one person may be combined with loans to other persons for purposes of [Finance Code §34.201] when:

(1) the proceeds of the loans . . . are to be used for the direct benefit of the other person ...; or

(2) the expected source of repayment for each loan ... is the same ....

The specific provision dealing with loans to a corporation and its owner or subsidiary, 7 TAC §12.4(c) [now 7 TAC §12.9(e)], defines a subsidiary as a corporation more than 50% of which is owned directly or indirectly by any person. Therefore, a corporation can be a subsidiary of an individual if the individual owns or controls more than 50% of the voting stock of the corporation. Under those circumstances, loans to a person and its subsidiary corporations may be combined for legal lending limit purposes, but need not be combined unless they meet one of the two tests outlined above.

In this instance, [Person A] owns 50% of the voting stock of the Corporation. Thus, the Corporation is not a subsidiary of [Person A] and the Corporation's loans will not be attributed to and combined with loans to [Person A] under [7 TAC §12.9].

The guarantee of the Corporation's debt by [Persons A & B], however, presents a different question. Pursuant to 7 TAC §12.2 [now 7 TAC §12.9(g)], the term "loans and extensions of credit," as used in [Finance Code §34.201], does not include liability as a guarantor, provided the bank is relying primarily on the creditworthiness of the primary obligor. Although, in your letter, you do not directly address the reliance issue, I was left with the impression that the guarantees were required because the Corporation has no assets other than the building and the individual investors would have had no personal liability because of the corporate structure of the business. It appears as though the Bank has placed a significant amount of reliance on the guarantees in its decision to make the loan to the Corporation. Therefore, in view of the Bank's reliance on the guarantees inferred from your letter, the liability of [Persons A & B] as guarantors will be treated as "loans or extensions of credit" to them for purposes of [Finance Code §34.201].

The aggregation and attribution rules for loans to a partnership, for purposes of legal lending limit, are addressed in 7 TAC §12.4(d) [now 7 TAC §12.9(f)]. A loan to the Partnership would be attributed to and aggregated with loans to [Person A], because, under the laws of the State of Texas, [Person A] would be personally liable for the debts and obligations of the Partnership.

Assuming both loans are totally funded, the total amount of loans outstanding [Person A], for legal lending limit purposes, would be $950,000, and the total outstanding to [Person B] for legal lending limit purposes would be $700,000.

This opinion is limited strictly to the facts and circumstances set forth herein and in your letter, dated April 15, 1994. Any change in those facts or circumstances, or the parties involved, may yield a different opinion.

Opinion No. 93-1

A state bank may provide archive management services to other community banks, directly or through a subsidiary.

January 11, 1993

Ann Graham, General Counsel

By letter dated January 5, 1993, you have asked whether state-chartered banks may offer archive management as a service to community banks. Archive management includes off premises storage of records and documents for the participating banks and their customers. The service also includes backup copies (microfiche or optical disk) for disaster recovery purposes, document destruction at predetermined dates and timely document retrieval. It is our understanding that you intend to offer this service through a subsidiary of the bank because of profitability accounting and liability concerns.

The Banking Department is of the opinion that the archive management service described is within the incidental powers provided by Texas Banking Code Article 342-301 [now Finance Code §32.001(b)(1)]. This opinion is limited to the parties and the facts set forth in this letter. Any change could result in a different legal conclusion.

Opinion No. 92-1

A bank can pledge assets to secure deposits of a bankruptcy trustee.

November 2, 1992

Ann Graham, General Counsel

By letter dated September 2, 1992, you have requested an opinion from the Texas Department of Banking on the issue of whether Texas state-chartered banks are permitted to pledge assets to secure deposits of bankruptcy estate funds by a trustee in bankruptcy. The answer to this question depends upon an interpretation of Texas Banking Code Article 342-603 [now Finance Code §34.304, current text substituted] which provides that:

(a) A state bank may not create a lien on its assets or secure the repayment of a deposit except as authorized or required by this section, rules adopted under this subtitle, or other law.

(b)  A state bank may pledge its assets to secure a deposit of this state, an agency or political subdivision of this state, the United States, or an instrumentality of the United States.

(c)  This section does not prohibit the pledge of assets to secure the repayment of money borrowed or the purchase of excess deposit insurance from a private insurance company.

(d)  An act, deed, conveyance, pledge, or contract in violation of this section is void.

We have determined that, while state-chartered banks are generally prohibited from pledging assets to secure private deposits, [Finance Code §34.304] does not prohibit a Texas state-chartered bank from pledging assets to secured deposits of bankruptcy estate funds by a trustee in bankruptcy. In reaching this determination, we have given particular attention and weight to the role of the bankruptcy trustee as an officer of the court and not a private person. Matter of Topco, Inc., 894 F. 2d 727 (5th Cir. 1990), reh'g denied 902 F. 2d 955; Matter of Evangeline Refining Co., 890 F. 2d 1312 (5th Cir. 1989). We also note that national banks are permitted to pledge assets to secure deposits of bankruptcy estate funds by a bankruptcy trustee. See the OCC opinion letter dated August 16, 1988 from Mary Wheat, Senior Attorney, OCC Midwestern District, to John C. Cozad.

Opinion No. 91-3

Loan's discounted purchase price, not face amount, is the measurement of the loan amount for legal lending limit purposes.

August 27, 1991

Ann Graham, General Counsel

By letter dated August 20, 1991, you have inquired about the application of the legal lending limit prescribed by Texas Banking Code Article 342-507 [now Finance Code §34.201] to the situation in which the bank purchases a loan with a face value greater than the bank's lending limit for a discounted purchase price less than the bank's lending limit. In that circumstance, our examiners would look to the amount actually expended by the bank to acquire the loan. If the discounted purchase price is within the bank's lending limit, there will be no violation.

As always, however, the bank must not neglect a thorough credit analysis. Loans which do not violate the lending limit may nonetheless be criticized if they represent imprudent credit decisions or poor documentation.

Opinion No. 91-2

Interim construction loans, subject to FmHA purchase obligations, are not subject to legal lending limits.

April 19, 1991

Larry A. Chilton, Departmental Examiner

This letter is in response to your inquiry as to the application of Article 342-507(b)(8) of the Texas Banking Code [Finance Code §34.201(a)(8)] to interim construction loans made by your bank, from time to time, which are subject to purchase obligations of the Farmers Home Administration (FmHA). Our review of this matter has been limited to sample correspondence from a standard form used by FmHA, as well as telephone discussions with FmHA regional office staff.

Based upon this review, it appears that FmHA is obligated to purchase from the bank and provide permanent financing for approved loans subject to certain conditions. Such conditions, however, are not unlike those contained in loan guaranty documents used in FmHA, FHA, SBA, and other similar government programs.

Consequently, such interim construction loans subject to all requirements of FmHA may be excluded from the limitation of [Finance Code §34.201(a)]. Nevertheless, the bank's documentation and handling of such loans will be reviewed during the course of examinations to ensure that all conditions imposed by FmHA are being fully satisfied. Furthermore, notwithstanding the exclusion from the statutory lending limitation, undue concentrations in such lending should be avoided.

Opinion No. 91-1

Loans to law firm clients are attributed to the general partners of the law firm that guaranteed the loans for legal lending limit purposes.

January 25, 1991

Cynthia N. Milne, Assistant General Counsel

Thank you for your letter of January 8, 1991 concerning possible attribution of loans to a Director or his law partner and loans to the firm's clients. I will rely on the facts as set forth in your letter, except to note that you have identified the Director as [*****].

The law firm acts as guarantor of the loans made by the Bank to the clients. The loans will be paid back by the client only if a sufficient recovery is made by the firm on the client's personal injury claim. The Bank is therefore not relying on the credit worthiness of the primary obligor for repayment of the loan, as required by Rule 12.2 [7 TAC §12.9(g)]. Consequently, we look to the tests set forth in Rule 12.4 [7 TAC §12.9(a)] to determine if the loans to either of the partners should be combined with the client loans for purposes of the lending limit calculation. Since the earnings of the law firm will be used for repayment of loans to the general partners and potentially for the repayment of the client loans, the source of repayment test is met and the loans would be combined for lending limit calculations.

Please note that this reply is based on the facts as set forth above and in your letter of January 8, 1991, and any change in those facts could result in a different response.

Opinion No. 89-3

Value behind drafts must be verified to qualify for "bill of lading" exception to legal lending limits.

October 27, 1989

Ann Graham, General Counsel

By letter dated September 20, 1989, you have asked whether certain transactions you describe will qualify for the exception to the legal lending limit provided by Article 342-507 [now Finance Code §34.201(a)(3); current text substituted] for

(3)  indebtedness secured by a bill of lading, warehouse receipt, or similar document transferring or securing title to readily marketable goods, except that:

(A)  the goods must be insured if it is customary to insure those goods; and

(B)  the aggregate indebtedness of a person under this subdivision may not exceed an amount equal to 50 percent of the lesser of the bank's capital and certified surplus or the bank's total equity capital " [also see 7 TAC §12.5(b)]

Your question is whether it is sufficient to verify the funds at the bank where the draft is to be paid and maintain a copy of the draft and shipper orders. The answer is no. The bank must also be able to establish that the drafts are drawn against actually existing values (meaning that the value of the goods supports the draft) and secured by a lien upon the goods in transit. You should also be advised that verification of available funds at the other bank at a given point in time is no assurance of final payment to your bank. Even transactions of this type which do meet all the technical requirements for exemption are not without risk and should be monitored carefully by your bank and by the bank examiners for safety and soundness purposes.

Opinion No. 89-2

To qualify for the legal lending limit exception, a segregated deposit account securing a loan must be in the lending bank.

October 17, 1989

Cynthia N. Milne, Assistant Attorney General

By letter of September 1, 1989, you requested a legal opinion regarding the above referenced examination. By telephone conversation with you, I understand that you are seeking the opinion only in regard to the legal lending limit violation discussed in No. 3 of your letter to the Commissioner dated July 21, 1989.

The issue is whether a deposit of less than $100,000 with banks who are FDIC insured constitutes an acceptable security to offset a loan above the originating bank's legal lending limit. The controlling statutory provision is Article 342-507(b)(11) of the Texas Banking Code [now Finance Code §34.201(a)(10)], which allows the bank to make loans to an individual above the legal lending limit if the indebtedness is fully secured by a segregated deposit account in the lending bank. [Finance Code §34.201(a)(10)] does not provide for a segregated deposit in another bank, which is what [*****] Bank chose to do in this instance. It is a principal of statutory interpretation that the intent of the legislature will be constructed from the law as written. Young v. Del Mar Homes, Inc., 608 S.W. 804, 807 (Tex. Civ. App. - Houston [14th Dist.] 1980, writ ref'd n.r.e.). The Department is therefore confined to the language of the statute and is not authorized to extend its interpretation to include segregated deposits at other banks.1

In support of [*****] Bank's action, you cite Article 342-507(b)(10) of the Texas Banking Code [now Finance Code §34.201(a)(8). Text of current Finance Code §34.201(a)(8) is substituted:]:

the portion of an indebtedness that this state, an agency or political subdivision of this state, the United States, or an instrumentality of the United States has unconditionally agreed to repay, purchase, insure, or guarantee

[Finance Code §34.201(a)(8)] contemplates direct indebtedness of the United States secured by U.S. Treasury notes or other obligations guaranteed by the United States or its agencies or instrumentalities, e.g., the 90% guarantee available for Small Business Administration loans. FDIC insurance does not constitute a direct indebtedness of the United States. Rather, it is an insurance program, which is funded by the insured banks. See 12 USC §1817. An additional consideration must be made from a safety and soundness viewpoint. There is no guarantee that the deposit at another bank is or will remain the only deposit of the borrower, so that the total deposit might exceed FDIC insurance to the detriment of [*****] Bank.

Opinion No. 89-1

Loans secured by letters of credit are not aggregated to the issuer of the letters of credit for legal lending limit purposes.

June 26, 1989

Cynthia N. Milne, Assistant General Counsel

Your letter of May 2, 1989, has been referred to me for response. You have asked whether loans to customers made on the basis of Letters of Credit to the customer from third parties constitute loans for the purposes of Article 342-507 of the Texas Banking Code [now Finance Code §34.201].

Pursuant to our telephone conversation of June 13, 1989, it is my understanding that the customer is obligated in all circumstances to repay any funds proffered to him by the Bank. The Letters of Credit from the third parties are considered by the Bank as collateral only. Additionally, the customer must perform an obligation to the third party in order to cause the third party to honor its Letter of Credit. The third party issuer of the Letter of Credit is in no way obligated to repay the funds to the Bank. On these facts, the transaction would qualify as a loan or extension of credit to the customer pursuant to 342-507(a)(1) [now Texas Finance Code §31.002(a)(34)] and the Regulations thereto, 7 TAC 12.2 [now 7 TAC §12.3], and would be considered against the Bank's lending limits.

Opinion No. 88-2

Use of a surrogate borrower will not evade attribution to the actual borrower for legal lending limit purposes.

April 29, 1988

Hubert Bell, Jr., Assistant General Counsel

This is in response to your request for an interpretation of the Department's lending limit regulations. Please excuse the delay in my response.

I will not restate the facts set forth in your letter. However, in summary, the question presented is whether a loan made to a joint venture for the purchase of an office building will be attributed to another bank customer who subsequently purchased the building from the joint venture.

Ordinarily, one would not expect lending limit rules to result in any form of restraint on the alienation of property, nor should they have such effect. It appears that the bank was aware [*****], its customer, would be the ultimate purchaser and user of the office complex purchased by the joint venture. He would also represent the source of repayment of the loan. Further it appears that the transaction between the bank and the joint venture was structured with this result in mind. Thus, the transaction has the appearance of circumvention; although, based on our discussions, I don't think this was the bank's intent. Direct financing of the complex by the bank for [*****] would have resulted in a lending limit violation. The joint venture purchased the complex which was financed by the bank and on the same, or the next, day the building was sold to [*****]. Also, [*****] makes his payments on the complex directly to the bank. These facts make it appear that the joint venture was acting as a surrogate.

Based on the facts of this particular transaction as I understand them, it is my opinion, at this time, that [*****] received the direct benefit, as well as represented the primary source of repayment, of the bank's loan to the joint venture, and thus the loan would be attributed to him. This opinion is subject to modification if there are other facts that may shed a different light on the transaction and its economic substance, or if my understanding of the facts is inaccurate. Otherwise, the bank should seek the least onerous means by which to correct the violation.

Opinion No. 88-1

Loans to a trust are not aggregated to the trustee for legal lending limit purposes.

April 6, 1988

Hubert Bell, Jr., Assistant General Counsel

Your letter of March 1, 1988, concerning Article 342-507 of the Texas Banking Code [now Finance Code §34.201] has been referred to me for response.

Based on our conversation, I understand that the trust instrument expressly provides that the trustee is not personally liable for obligations incurred by the trust. I further understand that the business activities engaged in by the trust and the other business ventures engaged in by the trustee, in his personal capacity, are not related, nor are the entities in any way financially interdependent.

In my opinion, loans to the trust will not be combined with the trustee's other independent borrowings from the bank when the trustee is acting in his fiduciary capacity.

Opinion No. 87-3

An overdraft can cause the total extensions of credit to exceed legal lending limits.

December 15, 1987

Hubert Bell, Jr., Assistant General Counsel

Your letter of November 20, 1987, concerning a lending limit question has been referred to me for response. Your questions surround the following facts or hypothesis:

Charlie Borrower, dba Charlie Borrower Motor Company has a loan as Charlie Borrower Motor Company, he has a loan as Charlie and Jane Borrower and also a small personal loan.

Charlie Borrower, dba Charlie Borrower Motor Company has an overdraft which causes loan limit of Charlie Borrower Motor Company to exceed the loan limit of the bank in Charlie Borrower Motor Company account.

I assume that Charlie Borrower Motor Company is a sole proprietorship, or if it's a corporation then I assume it represents Charlie Borrower's expected source of repayment of the loans involved.

First, pursuant to Department of Banking Rule 12.2 [now 7 TAC §12.3(a)(1)], unless an overdraft is an "intra-day" or "daylight" overdraft, it is considered as a loan or extension of credit for lending limit purposes. Intra-day or daylight overdrafts are excluded from this definition. Thus, no overline is created by overdrafts of this nature.

Based on the previously stated assumptions, the three loans to the Borrowers would be combined for lending limit purposes. Thus, in response to your specific question, yes, they would be "tied" to "make one line."

If the overdraft caused the total extensions of credit to Borrower to exceed the bank's lending limit the infraction could be brought into conformance by the borrower reducing the line to an amount within the bank's lending limit. The bank could also participate the excess to another institution. Although the violation would be addressed by such action, the question of potential director liability would remain. I understand one of your questions to be whether all three loans must be fully repaid before the potential liability is extinguished.

The general answer to this question is not necessarily [sic]; the specific answer, however, depends on a number of factors that must be considered, including the following:

1.  The bank's past record with regards to lending limit violations;

2.  Whether the facts surrounding the transaction reveal that the lending violation occurred in a knowing, intentional or blatant manner with disregard to applicable laws;

3.  The inter-relationship between the different lines of credit, i.e. inter-dependent or inter-related business ventures;

4.  The established repayment schedule of all loans in question and the actual payment history; and

5.  The existence, or lack thereof, of a particular business reason for the established repayment schedules and/or the underlying purpose of any efforts to have the Borrowers change or deviate from said schedule.

Opinion No. 87-2

A participation interest sold in a standby letter of credit is exempt from legal lending limits.

July 20, 1987

Hubert Bell, Jr., Assistant General Counsel

Your letter of July 2, 1987, concerning the applicability of the lending limit statute to a standby letter of credit has been referred to me for response. In the case you present, a written participation is in place that is at least equivalent in amount to any overline created by the standby letter.

It is my understanding that the participations referenced in your letter are all without recourse against [*****] Bank. I am aware of no prohibition that would prevent a bank from selling a participation interest in a standby letter of credit in the same manner it would sell a participation interest in an ordinary loan. In my opinion, a written enforceable participation agreement wherein an interest in a standby letter of credit is sold would have the effect of excluding the amount of such participation from a bank's lending limit.

Opinion No. 87-1

Collateral assignment of note given by individual is aggregated to the individual for legal lending limit purposes if the note serves as any part of the necessary security (Debt of B to A, taken by bank as collateral for loan to A, can cause the A loan to be attributed to B, if the collateral is necessary for loan to A).

July 16, 1987

Hubert Bell, Jr., Assistant General Counsel

The following is in response to your letter of July 8, 1987, requesting an interpretation of the lending limit statute. In your letter, you set forth the following:

"[Person A] has applied for a loan of $150,000.00 and has offer[ed] as security a note that he carries for [Person B] on a farm that [Person A] sold to [Person B] several years ago. The proceeds of the $150,000.00 loan will be used to pay off an unsecured loan owed to a Dallas bank by [Person A].

"It so happens that [Person B] is also a borrower of our bank. He has two loans, one on a dwelling and the other on cattle located in this area and not on the farm purchased from [Person A].

"The question is whether or not the $150,000.00 loan to [Person A] would have to be added to the two loans previously made to [Person B] in order to arrive at a loan limit for [Person B]? ([Person B] would be over the loan limit if the total loans were combined, not [Person A])."

If [Person B's] note serves as necessary security, in total or for any part, of the loan to [Person A], then in my opinion, a lending limit violation would be created. If, instead, [Person B's] note was only additional or supplemental security for the loan and the credit file clearly and unquestionably so evidenced such fact, then I think the additional collateral could be viewed in the same manner as an accommodation guaranty. (Accommodation guaranties are discussed in Department of Banking Rule 12.2 [now 7 TAC §12.9(g)]). As in the case of an accommodation guaranty, a bank official would need to certify to these facts. The credit file should contain said certification and the file indisputably show that the loan would have been made even in the absence of obtaining the "additional" collateral. Otherwise, the loans would be combined for lending limit purposes.

Opinion No. 86-2

The amount subject to legal lending limits after exclusion of the exception for indebtedness fully secured by a segregated deposit account depends on whether the security agreement is "all inclusive."

May 14, 1986

Hubert Bell, Jr., Assistant General Counsel

Your letter of May 8, 1986, concerning a legal loan limit matter has been referred to me for response.

Your letter requested an interpretation of the legal loan limit exception involving indebtedness fully secured by a segregated deposit account. If your bank utilizes an "all inclusive" security agreement the pledged deposit account would be subtracted from the aggregate debt relationship. An example would be as follows:

If your bank does not use the aforementioned security agreement, the segregated deposit would only be "netted" against that loan in which it is securing. An example using the same number above would be as follows:

Opinion No. 86-1

A bank director's secured guaranty given in connection with a third party debt does not cause the debt to be attributed to the director for legal lending limit purposes if the bank is relying on the primary obligor's creditworthiness for repayment of loan.

April 9, 1986

Hubert Bell, Jr., Assistant General Counsel

Your letter of April 2, 1986, concerning a legal lending limit matter, has been referred to me for response. In your letter you state the following:

We have a request from a customer for a $300,000 loan which is to be secured by the Collateral Assignment of a first lien real estate note, which note happens to have been executed by one of our Directors, [*****]. [*****]'s holding company also owns 100% of the stock of this bank.

The proceeds of this loan will go directly to our borrower, who is a very credit-worthy individual with a very liquid financial statement in excess of $1,000,000 and no debts.

We would very much like to make this loan; however, the question that we pose to you for a ruling is whether or not the amount borrowed would in any way affect the legal loan limit of [*****].

Although the proposed loan transaction you present is to be secured by the assignment of a first lien real estate note, the situation is analogous to one in which a guaranty is given by a third party as added security for a loan. In my opinion, Department lending limit rule 12.2 [now 7 TAC §12.9] under the definition of "Liability of Guarantors and Accommodation Parties," would apply to the loan transaction you proposed. Since you state that the primary obligor is "a very credit-worthy individual" and therefore I presume the bank is relying upon this individual (rather than [*****]) for repayment of the loan, I suggest that the bank follow the certification requirement contained in the above referenced section of [7 TAC §12.9]. You also state that the loan proceeds will be received by the borrower, thereby negating any possibility that [*****] will receive a "direct benefit" from the loan.

Based on the facts presented, the proposed $300,000 loan would not be attributable to [*****] for lending limit purposes. However, since there is a possibility that at some point, in the event of default, the bank may be looking to [*****] for repayment of the loan, I also refer you to Chapter 5, Article 9 of the Texas Banking Code [now Finance Code §33.109] for compliance with this statutory provision.