February 10, 1999

Re: Proposed Lockbox Activities in California by ________

Dear M ________:

This responds to your letter of December 9, 1998, as supplemented by ________’s voice mail message of December 18, 1998.

You have asked for confirmation that certain activities proposed to be conducted in California on behalf of ________ (“Bank”), an Illinois state commercial bank, would not require notice to or approval of the Commissioner and would not violate, or require compliance with, any California state law or regulation particularly applicable to financial institutions (as opposed to corporations generally). The proposed activities (“Subject Activities”) would be conducted in connection with Bank’s cash management services which it provides to its corporate clients.

As you have described, the Subject Activities are to be as follows:

Bank has established a wholly-owned non-bank subsidiary (“Subsidiary”) to perform activities in connection with Bank’s cash management business. Bank’s clients would direct their customers to remit payment checks to one or more post office boxes (“lockboxes”) in California. The lockboxes would be rented by and stand in the named Subsidiary. Checks received via the lockboxes on behalf of Bank’s clients would be processed by Subsidiary at a processing location established by Subsidiary in California. Employees of Subsidiary would pick up mail from the lockboxes daily, and deliver the mail to the processing location. There would be no public access to the processing location, and no business would be conducted with the public. Employees of Subsidiary would open the mail, endorse the payment checks on behalf of the client and on behalf of Bank so that Bank would appear as the bank of first deposit. The payment checks so endorsed would be deposited into Bank’s account in a clearing bank in California. Information about clients’ deposits would be transmitted electronically throughout the day from Subsidiary to Bank in Illinois. At the end of each day, Bank would credit the client’s account with Bank in Illinois, and the funds in Bank’s account with the California bank would be transferred to Bank.

Because employees of Subsidiary would be acting on behalf of Bank in endorsing payment checks for Bank and processing them for deposit into accounts maintained with Bank, the first issue raised by your letter is whether the Subject Activities constitute operating a branch office in California within the meaning of Article 2 (commencing with Section 3820) of Chapter 22 of Division 1 of the Financial Code. Financial Code Section (“FC”) 3820 prohibits a foreign (other state) state bank from transacting core banking business in California except at a branch office established in accordance with federal law and the law of the domicile of the bank. “Core banking business” is defined in FC 3800(b) as meaning the business of receiving deposits, paying checks, making loans, and other activities that the Commissioner may specify by order or regulation. This definition is based, in part, on the definition of branch banking business contained in 10 C.C.R. §10.6001(c) which is applicable to California state banks.

In the case of a California state bank, the definition of branch banking business specifically excludes the business of receiving deposits solely by means of either or both of (1) the United States mail address to a post office box, or (2) a messenger who is an independent contractor or an employee of the bank. Thus, a deposit processing facility of a California state bank, at which no business is conducted directly with the public, would not be deemed to be a branch office.

Because of the relationship and similarities between the definitions of “branch banking business” and “core banking business,” we conclude that the Subject Activities, which would not be considered branch banking business if conducted by a California state bank, should not be deemed to be a core banking business within the meaning of FC 3820, if conducted by or on behalf of a foreign (other state) state bank.

The second issue raised by your letter is whether the processing location where the Subject Activities will be conducted by Subsidiary on behalf of Bank should be deemed to be a facility within the meaning of Article 3 (commencing with Section 3840) of Chapter 22 of Division 1 of the Financial Code. FC 3841 prohibits an insured foreign (other state) bank from establishing or maintaining an office in California at which it engages in noncore banking business without complying with specified requirements. “Noncore banking business” is defined in FC 3800(e) as “. . . all activities permissible for commercial banks or trust companies, except core banking business, and except those activities prohibited by law or determined by the commissioner by regulation or order not to be noncore banking business.”

Processing remittances and endorsing checks are clearly permissible activities for a commercial bank, and the Commissioner has not excluded these activities from the definition of noncore banking business. However, while these activities have not been excluded as permissible activities, the Commissioner does not consider such activities to constitute “noncore banking business” within the meaning of FC 3841 for the reason that no business is being conducted with the public. By way of analogy, in the case of a California state bank, a place at which a California state bank transacts business does not on that account constitute a place of business of the bank unless the bank transacts business with the public at that location. Such non-places of business include a place where a bank may perform clerical, accounting, and similar services for itself and not for others. 10 C.C.R. §10.9001.

Accordingly, assuming no business is transacted with the public at the processing location and the Subject Activities are as you have described, we conclude that the processing location, which would not be deemed to be a place of business if established by a California state bank, should not be deemed to be a facility within the meaning of Article 3 if established by or on behalf of a foreign (other state) state bank.

The conclusions expressed in this letter are limited to the activities as described. If the Subject Activities are different from what you have described, our conclusions may be different. Further, the Commissioner administers, among other laws, the Banking Law (Division 1 (commencing with Section 99) of the California Financial Code. We express no opinion in this letter as to any other law or regulation, state or federal.

Very truly yours,

Acting Commissioner of Financial Institutions


Staff Counsel

cc: Department of Financial Institutions, San Francisco

bcc: J. L. Owen
D. L. Scott
J. E. Brodie
S. A. Dunlavey
W. G. Thompson
J. F. Carrig

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