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CHAPTER 107
Regulation #7
ACTIVITIES PERMISSIBLE FOR FINANCIAL INSTITUTION HOLDING COMPANIES
SUMMARY: This regulation, originally effective November 24,
1976 and most recently amended on December 14, 1983, was promulgated to
authorize Maine financial institution holding companies to engage in specific
closely related activities as enumerated in the Bank Holding Company Act of
1956 or Section 408 of the National Housing Act. Numerous changes have been
made to the Federal Acts and this state has kept pace with those changes by
allowing the Maine regulation to maintain parity whenever changes are made in
federal law or regulation.
Maine law specifically authorizes the Superintendent of the
Bureau of Banking to promulgate rules which are no more restrictive than
federal law and regulation. Maine law permits the promulgation of rules which
would grant greater authority to Maine financial institution holding companies
than federal rules. This revision grants additional powers that may be engaged
in either directly or through a subsidiary of a financial institution or a
financial institution holding company.
- 1. Authority
Title 9 B M.R.S.A. Section 1014 authorizes the
Superintendent to promulgate regulations specifying which closely related
activities, permissible under either the Bank Holding Company Act of 1956 or
Section 408 of the National Housing Act, shall be permissible for Maine financial institution holding companies. In 1987, Section 1014 was broadened by P.L.
1987, c. 90, by providing that the rules may authorize activities "which
are no more restrictive" than those permitted by federal law and regulation.
- Purpose
The Federal Reserve Board amended its Regulation Y
in 1984 and 1986, which revised and broadened the range of permissible closely
related activities. Many other states have been aggressive in authorizing new
powers for their financial institutions which have not yet been authorized by
the Federal Reserve Board. During the recent period of deregulation, both
state and federal regulators have more liberally interpreted existing laws and
regulations, thus broadening the scope of authorized powers. It is the intent
of the Bureau of Banking to permit Maine financial institutions or Maine financial institution holding companies to engage in activities at least as broad as,
or broader than, those activities authorized by federal law and regulation.
Since specific provisions are being added and existing
powers broadened on a continuing basis, it is burdensome for the Bureau to
amend this regulation each time federal regulations are amended. The Bureau,
therefore, authorizes all Maine financial institutions and all Maine financial institution holding companies to engage in closely related activities
authorized by federal regulation as well as those additional activities
authorized by this regulation, subject to approval of an application submitted
pursuant to Section 3.C of this regulation.
- Provisions of the Regulation
- Authorization
A Maine financial institution or a Maine
financial institution holding company may engage in closely related activities
as provided by federal law and regulation (Bank Holding Company Act of 1956, 12
U.S.C. subsection 1841 et. seq., 12 C.F.R. subsection 225.25 or Section 408 of
the National Housing Act, 12 U.S.C. subsection 1730(a), 12 C.F.R. subsection
583), unless the activity is prohibited by state law other than Title 9 B, but
subject to the Bureau approval of an application submitted pursuant to Section
3.C of this regulation. In addition to those activities authorized by federal
law and regulation, the activities listed below are so closely related to
banking or managing or controlling banks as to be a proper incident thereto and
consequently they are deemed to be "closely related activities" in
which a Maine financial institution or Maine financial institution holding
company may engage.
- Additional activities.
The activities listed below are so
closely related to banking or managing or controlling banks as to be a proper
incident thereto and may be engaged in by a Maine financial institution or a Maine financial institution holding company, or subsidiary of
either, subject to the requirements of a paragraph 3.C:
- Owning and operating a real estate
agency for the purpose of selling properties owned by a financial institution
holding company, financial institution, or subsidiaries thereof. This property
may include real estate acquired by foreclosure or deed in lieu of foreclosure,
real estate acquired for investment or development, or real estate owned by a
financial institution or affiliates. This activity shall be conducted subject
to the licensing and other requirements of the Maine Real Estate Commission.
- Requirements.
A Maine financial institution or a Maine financial institution holding company proposing to engage in any closely related
activity shall make application to the Superintendent, as required by Title 9 B
M.R.S.A. Section 1015, for prior approval of the activity. The application
will describe the nature of the proposed activity, the extent to which the
activity will be provided, and any other information requested by the
Superintendent. The application shall be accompanied by an application fee of
$2,500. The activities, enumerated in paragraph 3, may be engaged in directly
by the Maine financial institution or Maine financial institution holding
company or through a subsidiary of either. Any subsidiary engaging in closely
related activities may be jointly owned by two or more financial institutions
or financial institution holding companies or subsidiaries of either.
EFFECTIVE DATE: February 28, 1989
BASIS STATEMENT
I. FACTUAL AND POLICY BASIS OF THE RULE
The Bureau promulgated Regulation #7 on December 14, 1983
which authorized financial institution holding companies pursuant to Title 9 B
Section 1014.1 and financial institutions pursuant to Section 446 to engage in
"closely related activities" as authorized by the Bank Holding
Company Act of 1956 and Section 408 of the National Housing Act subject to the
application
requirements of Sections 446 and 1014. Regulation #7 was
originally promulgated on November 24, 1976. It was amended December 14, 1983
to provide contemporaneous changes in the list of permitted "closely
related activities" as the federal regulatory agencies added new
activities to the list. Title 9 B Section 1014.1 was broadened by the passage
of P.L. 1987, c. 90 in May, 1987. This amendment to Section 1014.1 required
the Superintendent to promulgate rules for closely related activities that were
no more restrictive than federal law and regulations. Implied in the new
statute regarding closely related activities is the authority for the Superintendent
to permit financial institution holding companies and financial institutions to
engage in closely related activities not authorized by federal law. Pursuant
to this additional rule making authority, the Savings Banks Association of
Maine and the Maine Bankers Association petitioned the Superintendent pursuant
to Title 9 B M.R.S.A. Section 255.2 to amend Regulation #7 to permit financial
institutions and financial institution holding companies to conduct commercial
real estate brokerage and travel agent activities.
Pursuant to the provisions of Maine’s Administrative
Procedure Act, a draft of Chapter 107 (Regulation #7) was promulgated September
30, 1988 with the public comment period to expire November 21, 1988. A public
hearing was held November 10, 1988. Several requests for an extension of the
comment period were received. As a result, proposed Regulation #7 was reopened
for an additional 30 day comment period which closed December 23, 1988.
COMMENTS COMMERCIAL REAL ESTATE BROKERAGE
The Bureau received 7 written comments from proponents
regarding the commercial real estate brokerage portion of the proposed rule.
These proponents included the Savings Bank Association of Maine
("SBA"), the Maine Bankers Association ("MBA"), and several
individual bankers. Several members of the banking industry also testified in
favor of the regulation at the public hearing. SBA and MBA offered amendments
at the public hearing and in subsequent written comments. One amendment would
permit brokering of property acquired through foreclosure or property in
process of foreclosure. Another amendment would grant the Superintendent the
authority to permit financial institutions and financial institution holding
companies to engage in unlisted activities. Another amendment related to the
assumption of public benefits and increased safety and soundness for
applications to conduct closely related activities. (These latter two
amendments are discussed in a subsequent section.) Those commenting and/or
testifying on behalf of the banking industry provided the following reasons for
adding commercial real estate brokerage to the list of closely related
activities:
- Commercial real estate brokerage is a natural
extension of banks’ real estate lending and equity investment authority. The
skills and knowledge required to successfully conduct commercial real estate
lending and real estate investment are also fundamental to the competent
practice of real estate brokerage.
- Conduct of real estate brokerage would enhance
the safety and soundness of the banking industry by providing additional fee
income with incremental increase in risk.
- Non bank competition are involved in real
estate brokerage. Financial service firms such as Merrill Lynch, Sears, etc.
which compete directly with banks for many services are in the real estate
brokerage business.
- Certain areas of the state, which lack
adequate commercial real estate brokerage services, would benefit.
- Consumers would benefit from the increased competition
created by the entry of banks into this field.
- Twelve other states permit banks to conduct
real estate brokerage.
The Bureau received approximately 208 written comments from
real estate brokers in opposition to all or portions of this proposed
regulation. Several individuals testified in opposition at the public hearing,
including a representative of the Maine Association of Realtors
("MAR"). The oral and
written opposition are summarized as follows:
1) Allowing banks to conduct commercial real
estate brokerage is anti competitive because banks would have an unfair
advantage of providing financing whereas brokers do not.
2) The proposal is detrimental to consumers as
buyers generally rely on a bank’s objectivity in financing a transaction to
protect the buyers interest as well as the banks. Since a bank who may also be
acting as broker is representing and receiving a commission from the seller, a
bank’s traditional objectivity may be compromised.
3) The proposal also impacts consumers negatively
as brokers may choose not to introduce potential buyers to banks which compete
in the brokerage business. This would also adversely affect sellers.
4) There is an inherent potential for banks to be
more inclined to book marginal loans for the sake of earning a sales
commission.
5) Competing brokers would not refer clients to
banks in the commercial real estate brokerage business, which would negatively
impact a bank’s loan volume.
6) Many brokers specializing primarily in
residential real estate also stated that this proposal would ultimately lead to
banks getting involved in residential real estate brokerage.
STATUTORY CONSIDERATIONS COMMERCIAL REAL ESTATE BROKERAGE
The Bureau is required to consider these arguments within
the context of the Maine Administrative Procedures Act, Sections 8052 and 9052,
and the Maine Banking Code, Sections 111 and 1014.1.
Section 111 of the Banking Code requires the Bureau of
Banking to supervise the activities of financial institutions in a manner to
insure the strength, stability, and efficiency of all financial institutions,
to assure reasonable and orderly competition, thereby encouraging the
development and expansions of financial services advantageous to the public
welfare. Promulgation of rules, therefore, must consider this legislative
declaration of policy.
Section 1014.1 requires that the Bureau find that non
banking activities be closely related to banking. Although this requirement is
not explicitly stated in Section 1014.1, it is implied by the references to
federal law incorporated in the statute, use of the phrase "closely
related activities" in Section 1015.1, and by legislative history. When
Section 1014.1 was originally enacted into law, it required the Superintendent
to determine which of the non banking activities authorized by the Federal
Reserve Board pursuant to the Bank Holding Company Act of 1956 and the Federal
Home Loan Bank Board pursuant to Section 408 of the National Housing Act would
be authorized for Maine financial institution holding companies and financial
institutions. These references to federal law are still contained in Section
1014.1. Section 4(c)(8) of the Bank Holding Company Act requires the Federal
Reserve Board to determine that activities be "so closely related to
banking or managing or controlling banks as to be a proper incident
thereto…" Section 408(c)(2)(F)(i) of the National Housing Act
references the Bank Holding Company Act of 1956 and Section 408(c)(2)(F)(ii)
references a list of activities prescribed by
regulation (12 CFR 584.2 1(b)) which generally related to
traditional savings and loan real estate activities (real estate brokerage not
included). Section 1015.1 of the Maine Banking Code sets forth application
requirements for engaging in a closely related activity. The Governor’s Banking
Study Advisory Committee Report, which formed the basis for the 1975 Banking
Code Recodification, recommended that state statutes "paralleling the
Federal Bank Holding Company Act be enacted and that statutory criteria for
decision making conform to Federal criteria." Although the passage of
P.L. 1987 c. 90 removed certain parallelisms with federal statute, the
statement of fact accompanying L.D. 1208 states, "…. allows the
superintendent to determine what constitutes banking related
activities…" Since the statute provides no criteria for determining
what constitutes a "banking related" or "closely related"
activity, the Bureau has applied the criteria of the Federal Reserve Board.
These criteria were established by the courts in the National Couriers
Association v. Board of Governors 516 F.2d. 1229 (1975), and are as follows:
- Banks have generally provided the proposed
service;
- Banks generally provide services that are
operationally or functionally so similar to the proposed services as to equip
them particularly well to provide the proposed services;
- Banks generally provide services that are so
integrally related to the proposed services as to require their provision in a
specialized form.
CONCLUSION COMMERCIAL REAL ESTATE BROKERAGE
Applying these criteria, the Bureau concludes that
commercial real estate brokerage could be considered a closely related banking
activity. Admittedly criteria #1 and #3 are not applicable, but #2 is
applicable to commercial real estate brokerage. Many of the state’s savings
banks and trust companies have been actively involved in commercial real estate
lending for many years. The skills and knowledge required by a bank and its
employees to successfully engage in commercial real estate lending are also fundamental
to success in the commercial real estate brokerage field. Brokers and lenders
must have expertise in finance, market conditions, zoning ordinances, property
valuation and appraisals, project viability analysis, and related tax law in
order to be successful in the commercial real estate field.
Despite our conclusion that commercial real estate brokerage
could legitimately be considered a closely related activity, other potentially
adverse effects of the
proposed rule must be considered. The opponents of the rule
argued that the inherent conflicts of interest of being both a lender and
broker for a particular transactions could be detrimental to all parties
involved. Opponents submitted that banks may make poorer quality loans to earn
sales commissions. Buyers, who traditionally view a bank’s objective lending
decision as protecting their interest in a transaction, may also suffer from
"sales oriented" lending decisions by banks. Sellers, buyers, and
financial institutions would also suffer as commercial brokers would have a
tendency not to introduce clients to financial institutions competing in the
brokerage business. This would reduce a buyer’s financing options and could
result in the seller not receiving as much value for his property. Opponents
also argued that brokers could not effectively compete with banks for listings
due to sellers’ perceptions that a bank could more effectively market property
because of its ability to also provide the financing. The fact that brokers do
not feel comfortable approaching a competitor for their own financing needs
would also reduce competition.
Proponents of the rule did not effectively address these
issues in their written and oral testimony. No evidence was presented on the
effects on competition and consumers in states which permit banks to conduct
brokerage activities or in states where it is common for brokers to provide
residential financing through affiliations with mortgage companies. Also,
potential methods for dealing with the conflicts of interest issues were not
addressed. The Bureau is particularly concerned that the mutually beneficial
relationship which exits
between banks and real estate brokers will be adversely
altered to the detriment of the banking industry, the brokerage industry, and
the general public. It is possible that brokers, approximately 80% of whom
derive a portion of their income from selling commercial property, will choose
not to do business with banks, including those not conducting commercial
brokerage, whenever possible. Considering that banks have many non bank
competitors providing residential and commercial mortgage financing in Maine
and in other states, a change in the relationship between banks and brokers has
the potential to be significantly detrimental to the state. Proponents also
failed to demonstrate a public need for additional commercial brokerage
services. There are approximately 2,800 members of the Maine Association of
Realtors. Approximately 4% of these engage primarily in commercial real estate
brokerage. An estimated 80% of brokers primarily engaging in residential sales
occasionally sell commercial properties. MAR also believes there are
significant numbers of brokers, whose sole business is commercial real estate,
that do not belong to their organization. The Bureau also believes this is not
an appropriate time for banks to become more heavily involved in commercial
real estate activities. During 1988, the volume of non performing commercial
real estate loans increased significantly in Maine and the other New England
states. For these reasons, the Bureau is not including
general commercial real estate brokerage activities on the list of permissible
activities at this time.
The Bureau does, however, support the concept that financial
institutions and financial institution holding companies be permitted to broker
any real estate it owns directly or through subsidiaries subject to the laws
and regulations of the Maine Real Estate Commission. The original amendment
offered by SBA and MBA was limited to properties acquired by foreclosure and
those in process of foreclosure. Since Chapters 54, 64, and 74 permit trust
companies, savings banks, and savings and loan associations directly invest in
real estate subject to certain capital limitations, it follows that financial
institutions should be permitted to broker real estate acquired for
development, investment, or other purposes as well. This is consistent with 12
CFR Section 545.74(c)(3)(v) which permits federal savings and loans to broker
owned property through service corporations. Many of the brokers who commented
did not object to this concept as they considered it analogous to a "For
Sale by Owner" situation. The Bureau, however, chooses not to extend this
authority to property in process of foreclosure due to conflicts of interest
between a bank and a borrower in a loan default situation.
COMMENTS TRAVEL AGENCY ACTIVITIES
The Bureau received seven written comments from proponents
regarding the travel agency portion of the proposed rule. These proponents
included the Savings Bank Association of Maine ("SBA"), the Maine
Bankers Association ("MBA"), and several individual bankers. Several
members of the banking industry also testified in favor of the regulation at
the public hearing. The arguments of the proponents for the rule can be
summarized as follows:
- Nine other states permit banks to own and
operate travel agencies;
- One financial institution in Maine operates a
"grandfathered" travel agency;
- Consumers will obtain better quality and/or
lower priced travel services as a result of increased competition;
- Other financial intermediaries, such as
American Express and Sears Roebuck are involved in providing travel services;
- The providing of travel service is not
materially different from providing quality financial service.
The Bureau received approximately 37 comments in opposition
to the travel agency section of the proposed rule. These comments included a
comprehensive study, The Travel Agency Industry in Maine and Impacts of
Revising Regulation #7, by Raymond P. Neveu, Ph.D., Professor of Finance at the
University of Southern Maine. Maine AAA, a large travel agency with six
offices in the state, testified in opposition along with four other representatives
of the travel agency industry in Maine at the public hearing. The arguments of
the opponents can be summarized as follows:
- The activity represents a mixing of banking and
commerce. Agents should not be in the position of having to obtain business
financing from a competitor;
- The proposal is anti competitive as travel
agents could not compete with a bank and its resources;
- Travel agent activities are not related to
banking. The combination of knowledge and skills required is not comparable to
traditional banking functions;
- Consumers would not benefit;
- Banks would not benefit financially from the
travel agent business as it is marginally profitable.
STATUTORY CONSIDERATIONS TRAVEL AGENCY ACTIVITIES
The statutory considerations for travel agency activities
are discussed in the commercial real estate brokerage section.
CONCLUSION TRAVEL AGENCY ACTIVITIES
Upon consideration of the evidence presented and the Federal
Reserve Board criteria discussed previously, the Bureau is not persuaded that
travel agency activities are now closely related activities. Banks have not
generally provided this service in the past, less than 1% of commercial banks
in the nation engaged in travel services in 1978; there is no evidence that
banks provide services that are operationally so similar to the business of
travel agencies as to equip them particularly well to provide this service;
and, there is not a banking service that is so integrally related to travel
agency services as to
require a bank to provide the service in a specialized
form. In those few other states which permit banks to own and operate travel
agencies, all but one authorized this activity directly by statute; whereas,
the Bureau must make a determination that an activity is closely related to
banking within the context of rule making. Although the state is not
necessarily bound by the decisions of federal regulators and federal courts,
the Bureau is not persuaded that a material change in the facts have occurred
since a federal court decision in the Arnold Tours, Inc. v. Camp, 472 F.2d. 427
(1st Cir. 1972) which overturned a Comptroller of the Currency regulation
permitting national banks to provide travel services or the Association of Bank
Travel Bureaus, Inc. v. Board of Governors, 568 F.2d. 549 (7th Cir. 1978) case
in which the court upheld the Federal Reserve Board’s determination that travel
agency services were not closely related to banking. For these reasons, the
Bureau will not add travel agency activities to the list of permissible
activities at this time.
OTHER PROPOSED AMENDMENTS
As stated previously, the banking industry proposed an
amendment that would permit a financial institution holding company or
financial institution to apply to the Superintendent for prior approval to
conduct unlisted activities as permitted by the Bank Holding Company Act. The
Bureau rejects this amendment as it exceeds our statutory authority. Section
1014.1 states "… The Superintendent shall adopt rules specifying which
activities are permissible…" At this time, there is no statutory
foundation for the Superintendent determining which activities are closely
related to banking on a case by case basis for individual financial institution
holding companies or financial institutions.
The banking industry also proposed the following amendment
to section 3.C. of the rule:
"Unless the record demonstrates otherwise,
the commencement or expansion of any activity pursuant to this rule is presumed
to result in benefits to the public and increase safety and soundness through
increased competition."
The proponents of this amendment purport that this language
is similar to 12 CFR Section 225.24 governing applications to the Federal
Reserve Board and can be based upon the statutory references to the Bank
Holding Company of 1956 in Title 9 B Section 1014.1. 12 CFR Section 225.24, however,
states that public benefits result through increased competition from
commencement or
expansion of a non banking activity on a de novo basis
unless the record demonstrates otherwise. Secondly, enhancements in the safety
and soundness of the applicant are clearly not presumed by Section 225.24.
Regardless of the language and intent of Section 225.24, the Bureau rejects the
amendment as it is contrary to the requirements of the Maine Banking Code.
Title 9 B M.R.S.A. Sections 446 and 1015.2 refer to the requirements of
Sections 252 and 253. Section 253 establishes the criteria for decision making
regarding and application and states clearly that the burden for proving public
convenience and advantage and enhancements to the financial strength of a financial
institution rest with the applicant.
