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What Banks and Thrifts Must Do When Closing a Branch OfficeBy James T. Bork, J.D., LL.M., editor, CCH BANKING COMPLIANCE LIBRARY. Bork has practiced banking law and served as in-house bank counsel. He also has written articles and spoken on bank regulatory and compliance issues.Because banks do not close branch offices too often, those who handle the compliance aspects of a branch closing may be unclear about what the regulators require. This article reviews this topic and looks at the federal bank regulators’ 1999 policy statement concerning branch closings.Compliance professionals deal primarily with matters of lending and deposit taking. Other regulatory compliance issues may arise, however, and require attention from time to time. In ideal circumstances, these other issues are attended to before the examiners arrive. One of these involves what banks and thrifts must do in connection with the closing of branch offices. The closing of branch offices of insured institutions is governed by Section 42 of the Federal Deposit Insurance Act (12 USC §1831r-1) and the federal bank regulators’ 1999 policy statement concerning branch closings. The policy statement was published at 64 Federal Register 34844. JOINT POLICY STATEMENT ON BRANCH CLOSINGS Insured depository institutions are required to provide notice to the appropriate federal regulator and their affected customers regarding any proposed branch closing and to adopt a policy regarding branch closings. The appropriate federal regulator is the Federal Reserve Board or Federal Deposit Insurance Corp. for state member banks and state non-member banks, respectively. A bank that maintains branches in more than one state that wishes to close a branch located in a low- or moderate-income area is subject to additional requirements.WHAT COUNTS AS A “BRANCH” FOR PURPOSES OF SECTION 42 This is an easy one, provided you remember a few specific exclusions. For purposes of Section 42, the regulators consider a “branch” to be a traditional brick-and-mortar branch, or any similar banking facility other than a main office, at which deposits are received or checks paid or money lent. This basic definition of what constitutes a branch is at least as old as the McFadden Act.In 1996, Congress amended Section 42 to specifically provide that the branch closing requirements do not apply to ATMs. The requirements also do not apply to the closing of other non-branch facilities such as remote service facilities, loan production offices or temporary branches. Insured branches of foreign banks are not considered to be branches for purposes of Section 42. WHAT COUNTS AS A “BRANCH CLOSING” FOR PURPOSES OF SECTION 42 The category of branch closings subject to the Section 42 requirements is very broad, and includes all branch closings other than those specifically excluded by Congress or the federal bank regulators. The requirements apply to almost all branch closings, including those that occur in the context of mergers, consolidations and other forms of acquisitions. The relocation or consolidation of a branch or branches within a single neighborhood is generally not subject to the branch closing requirements, but only if the event does not substantially affect the nature of business or the customers served. The requirements also do not apply when branches are closed in connection with emergency acquisitions or FDIC assistance to troubled institutions.Branch relocations will generally not be subject to Section 42 when a short distance is involved, such as a move across the street, around the corner or a block or two away. The policy statement notes, however, that even moves of less than 1,000 feet will generally be considered to be relocations. National banks and federal savings banks should be aware that the Office of the Comptroller of the Currency and the Office of Thrift Supervision have regulations that specify the distances that those regulators consider to be short-distance relocations. CHANGE OF BRANCH SERVICES; CESSATION OF SERVICES A change of services offered at a branch is generally not considered to be a branch closing, provided that the facility continues to constitute a branch. A change of services that results in the facility no longer being a branch, however — e.g., where an institution replaces a brick-and-mortar branch with an ATM — does constitute a branch closing and is subject to the requirements of Section 42.In addition, the requirements of Section 42 do not apply when an institution stops providing services at a branch but does not close the branch. The most common example of this situation would be a temporary interruption of service caused by an event beyond an institution’s control (e.g., a natural catastrophe). If an institution decides not to reopen the branch following the interruption, however, the requirements of Section 42 would apply, although the institution is excused from providing the closing notice in advance as is ordinarily required. REQUIRED NOTICES OF INTENT TO CLOSE A BRANCH Advance notice to federal regulator.—Section 42(a) requires that any insured depository institution proposing to close a branch must provide at least 90 days advance written notice of the proposed closing to the appropriate federal banking regulatory agency. This agency is, generally speaking, the institution’s primary federal regulator. For state-chartered banks, the primary federal regulator is the Federal Reserve Board for member banks and the Federal Deposit Insurance Corp. for non-member banks. This notice must identify the branch to be closed and must provide a detailed statement of the reasons for the decision to close the branch, including statistical or other information in support of such reasons. An agency will consider requests for confidential treatment of supporting information submitted under separate cover. Advance notice to branch customers.—Section 42(b) requires that any insured depository institution proposing to close a branch must provide two separate notices to the affected branch customers as follows:
The written notice delivered to customers must identify the location of the branch to be closed and must include the proposed closing date. It must also either inform the customers where they may obtain banking services after the closing date or provide a telephone number that customers can call to learn where they may obtain such services.
The customers entitled to receive the notice are those who have been identified by the institution through the good faith use of reasonable methods of allocating customers to specific branches. It is possible that a reasonable method of allocation may result in no customers being identified with a facility that technically constitutes a branch. If such a branch is closed, the written notice requirement is waived.
PROVISIONS
APPLICABLE
TO CERTAIN INTERSTATE
BANKS
If an interstate bank proposes to close a branch located in a low- or moderate-income area, it must include with its notice to customers the mailing address of the appropriate federal banking regulatory agency and a statement that comments regarding the branch closing may be mailed to the agency. The notice should also state that the agency does not approve or prevent the branch closing. In this context, an interstate bank is one that maintains branches in more than one state.
The policy statement provides that in the case of an institution that will become an interstate bank prior to the closure of a branch in a low- or moderate-income area, that fact must be included in the notice to customers unless the branch closure will occur immediately upon the consummation of the transaction that causes the institution to become an interstate bank.
Persons from the low- or moderate-income area in which the branch is located may submit written comments regarding the adverse effect of the branch closing on the availability of banking services in the area and request a meeting to discuss the matter. If an agency receives one or more nonfrivolous requests, it will invite individuals and organizations in the affected area, as well as representatives of other depository institutions and their regulators, to meet and explore the feasibility of obtaining alternative banking facilities and services.
For purposes of Section 42 and the policy statement, a low- or moderate-income area is a census tract in which the median family income is less than 80 percent of the median family income for the metropolitan statistical area (MSA) in which the census tract is located. For census tracts not located in MSAs, the comparison of median family income is made with other census tracts within the same state that are not in any MSA.
BRANCH CLOSING
POLICIES
Section 42 requires all insured institutions that have branches to adopt written policies for branch closings. These policies must be sufficient to meet the needs of the institutions adopting them and must include factors for making decisions about which branches to close, which customers must receive written notices and procedures for providing the notices required by law.
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