Banking Interpretations

NYSBL 131(1), 222

June 20, 2006

Campbell Wallace, Esq.
Associate Counsel
Assembly Minority Counsel's Office
Room 440, Capitol
Albany, New York 12248

Dear Mr. Wallace:

I write in response to your letter of May 2, 2006 addressed to Deputy Superintendent and Counsel Sara Kelsey. Your inquiry concerns Section 131 of the New York Banking Law, and the applicability of this section to industrial loan companies.

As a matter of initial clarification, I note that industrial loan companies (or industrial banks, as they were known in New York) are no longer a charter option under New York Banking Law. Article VII of the NYBL was repealed in 1972. No New York-chartered industrial banks exist at this time. A handful of other states, including Utah (most notably), California, Colorado, Nevada, and a few others, offer the industrial loan company (or "ILC") charter. ILC charters offered by these states are generally offered pursuant to state statutes that were "grandfathered" under the Competitive Equality Banking Act of 1987 ("CEBA"). ILCs chartered under such statutes are not deemed "banks" for purposes of the federal Bank Holding Company Act of 1956, as amended ("BHC Act"). Thus their parent companies are not subject to supervision by the Federal Reserve as bank holding companies. However, CEBA foreclosed the possibility of enactment of additional state statutes that would permit the chartering of such ILCs that, like those chartered pursuant to the grandfathered statutes, would be deemed so-called "nonbank" banks under the federal BHC Act.

A distinguishing characteristic of an ILC is that it may be owned by a commercial or industrial firm. Otherwise, ILCs operate very much like other state- and nationally-chartered banking depository institutions, and are insured by the FDIC. For purposes of the NYBL, an out-of-state ILC is viewed similarly to an out-of-state state chartered bank. Thus, for example, for purposes of New York's interstate branching act in Article V-C of the NYBL, an ILC may establish a branch office in New York state under the same conditions as other out-of-state banks.

NYBL Section 131 is the so-called "non-encroachment" provision of the NYBL, which is designed to prohibit companies from engaging in banking operations in New York without proper authorization. This section would apply to prohibit unauthorized banking operations by either an out-of-state banking organization (such as an ILC) or a company which is not a banking organization. As a general rule, the section prohibits deposit-taking and other activities indicative of a banking business in New York, unless of course, a company was properly licensed to engage in banking business in New York.

You asked several questions about the relationship between an ILC and its parent company, and how NYBL 131 would apply to both of these entities. The intent of your questions is not entirely clear. As a general rule, the corporate status of an ILC's parent would not be imputed to the ILC itself, so as to give the ILC's parent an ownership interest in the funds of the ILC. The ILC would be a banking institution unto itself. Pursuant to Article V-C of the NYBL, an out-of-state ILC could, under certain circumstances, be authorized to operate a branch office in New York. This office would be considered an office of the out-of-state ILC alone, and not of the ILC's parent company. As a non-bank institution, we do not envision a scenario under which an ILC's parent itself could establish an office to engage in banking operations in New York. You also ask questions concerning whether limiting certain activities performed by an ILC or its parent company in New York would be sufficient to prohibit a violation of NYBL section 131. The Department would require additional facts to provide guidance to you concerning these questions.

I hope that this provides some help. It might be more useful if we could discuss your additional questions by telephone. Please feel free to call me at (212) 709-1663.

Very truly yours,

Rosanne Notaro
First Assistant Counsel