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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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One Financial Place

440 South LaSalle Street, Suite 2700

Chicago, IL 60605-1073

**Interpretive Letter #1041**

**October 2005**

**12 USC 24(7)**

September 28, 2005 **12 CFR 7.5002**

#### 12 CFR 7.5001

Re: Performance of Escrow Activities by a National Bank

Dear **\[ \]**:

This is in response to your letter on behalf of **\[ \]** (the "Bank")
regarding the proposed performance of escrow agent activities by the
Bank.

####### Proposal

More specifically, **\[ \]**[^1] and the Bank propose to enter into a
master agreement whereby the Bank will act in one of two capacities. The
master agreement will govern the terms of the relationship between **\[
\]** and the Bank. First, in those situations where**\[ \]** acts as the
funds control agent and **\[ \]** has determined that it is not
necessary to have a bank as a party to the escrow agreement, the Bank
will act solely as the depository for the monies collected by **\[ \]**.
In those situations, the Bank will follow its standard depository
account practices and procedures. Second, in those situations where **\[
\]** determines that it is necessary to have a bank as party to the
escrow agreement, **\[ \]** will continue and act as funds control
agent, but the Bank will become a party to the escrow agreement as
"escrow agent."[^2] The Bank will also act as a depository bank. **\[
\]** will make the determination whether it is necessary to have the
Bank become a party to the escrow agreement. In either case, the Bank
will act as a depository bank for funds to be placed in escrow.

When acting in its capacity as an escrow agent, the Bank's obligations
will be limited to: (1) receiving funds from the project owner or
contractors; (2) depositing the funds into a separate non-interest
bearing account for each project; (3) honoring checks written against
the account; (4) mailing monthly account statements; and (5) providing
on-line access to the necessary parties. All other services and work
associated with the escrow agreement will be performed by **\[ \]** as
an independent party to the Agreement.[^3]

In order to limit the exposure of the Bank, **\[ \]** will: (1)
indemnify the Bank for any of **\[ \]**' actions in performing its
duties under an escrow agreement; (2) will utilize the Bank's Positive
Pay service (or indemnify the Bank for losses arising from counterfeit,
fraudulent or forged checks); and (3) will maintain Commercial General
Liability ("CGL") and Errors and Omissions ("E&O") insurance of at least
\$1,000,000 per occurrence and a fidelity bond of at least \$500,000 per
occurrence. Further the majority shareholder of **\[ \]** has agreed to
sign a separate guaranty agreement covering all obligations of **\[ \]**
to the Bank under the master agreement and all escrow agreements.
Perhaps the most important way in which the Bank's liability is limited
is that the Bank's duties under the escrow agreement are limited to what
in essence are purely bank functions. The Bank takes no role in the
funds control process, and essentially acts solely as depository bank.

In situations where the Bank will not act as escrow agent, the Bank will
receive its standard depository fees. In exchange for the Bank acting as
the escrow agent (i.e., for funds control projects where the Bank is a
party to the escrow agreement), it will receive 0.15% of the amount of
the contractor's construction contract and \$250 for account set up. The
term of the master agreement will be for three (3) years initially with
the option to renew for successive one (1) year terms. Finally, all
deposits made to a particular escrow account will be made via wire
transfer, ACH, or check at the Bank's established offices in **\[
*State* \]**. The Bank will review its operating procedures to determine
compliance with the Bank Secrecy Act when acting as an escrow agent.

####### Discussion

The Bank will provide escrow services in the context of its other
depository services available to its customers. As an escrow agent, the
Bank will: 1) receive funds from the project owner or contractor, 2)
deposit funds into a separate non-interest bearing account, 3) honor
checks written against the account, 4) mail monthly account statements,
and 5) provide on-line access to the necessary parties. The five
activities described above are traditional banking activities that are
either expressly permitted by statute or incidental to those services.

The OCC has approved banks providing escrow services in a variety of
contexts. The OCC has approved escrow services in the context of
mortgage banking where a bank subsidiary would originate, arrange, make,
hold, purchase, sell, warehouse, and service mortgage loans, as well as
conduct loan closing, escrow, appraisal management, property inspection,
and related activities.[^4] Further, the OCC has approved national banks
providing escrow services in the context of collecting real estate
taxes.[^5] Both the general escrow services associated with mortgage
banking and the real estate tax escrow services have been approved when
they are provided to the bank, its subsidiaries, other affiliates and
other unrelated entities. Finally, there is older OCC precedent that
permitted the provision of escrow services by a national bank and its
subsidiaries for itself or other banks, as "a proper activity for
national banks."[^6] Therefore, we believe that the Bank's proposed
activities are consistent with existing OCC precedent.

Further, the first three activities listed when the Bank acts as escrow
agent constitute depository and check cashing functions that are
enumerated powers set forth in statutory law. Among other activities, a
national bank may exercise:

...all incidental powers as shall be necessary to carry on the business
of banking; by discounting and negotiating promissory notes, drafts,
bills of exchange and other evidences of debt; by receiving deposits; by
buying and selling exchange, coin, and bullion; by loaning money on
personal security; and by obtaining, issuing, and circulating notes....

12 USC § 24(Seventh). The provision of monthly account statements to
customers is also part of the Bank's powers to receive deposits and a
safe and sound banking practice. Finally, we believe that the provision
of on-line access to customers is the functional equivalent to providing
non-electronic account statements and account access. Since national
banks must be able to make use of modern technology in performing their
business, the OCC's regulation, 12 C.F.R. § 7.5002(a), permits national
banks to "perform, provide, or deliver through electronic means and
facilities any activity, function, product, or service that \[they are\]
otherwise authorized to perform, provide, or deliver...." Pursuant to 12
C.F.R. 7.5001(c), in determining whether an electronic activity is
considered part of the business of banking, the OCC considers, among
other things, whether the activity: is the functional equivalent to or a
logical outgrowth of a recognized banking activity, benefits the
customers, involves similar risks to those already assumed by banks, and
is authorized for state-chartered banks. Providing on-line access to
accounts is clearly part of the business of banking as it is the
functional equivalent of providing a customer with non-electronic access
to accounts, benefits customers, involves similar risks already assumed
by banks, and is authorized for state-chartered banks. Therefore,
providing on-line access to parties is a permissible activity pursuant
to 12 C.F.R. § 7.5002 and considered part of the business of banking. It
is also is an activity that has been previously approved by the OCC.[^7]

In summary, we believe that the proposed provision of escrow services by
the Bank in connection with the proposed depository services is part of
the Bank's depository function.[^8]

If you have any questions regarding this issue, please contact Christina
Trojan-Masnyk at (312) 360-8805.

Sincerely,

**signed**

Coreen S. Arnold

District Counsel

Central District

[^1]: **\[ \]** ("**\[ \]**") performs funds control activities for
    construction projects throughout the United States. **\[ \]** acts
    as funds control agent on construction contracts where the surety
    will not issue a bond with respect to a contractor unless the funds
    paid to the contractor by the owner are "controlled" by a third
    party (i.e., **\[ \]**), so that the surety can be confident that
    subcontractors of, and material suppliers to, the contractor will be
    paid.

[^2]: The Bank expects that it will be acting as an escrow agent in most
    situations since they expect that the surety will likely require it.

[^3]: If **\[ \]** will be acting as agent or a service provider to the
    Bank, please be mindful of the risk management guidance set forth in
    OCC Bulletin 2001-47 (November 1, 2001) on "Third-Party
    Relationships".

[^4]: *See, e.g.,* OCC Conditional Approval No. 338 (November 10, 1999);
    OCC Corporate Decision No. 99-33 (September 28, 1999). Also, please
    note that "real estate settlement, closing, escrow, and related
    services...." are activities listed as requiring only "notice" to
    the OCC for national bank operating subsidiaries, pursuant to
    12 C.F.R. § 5.34(e)(5)(v)(V).

[^5]: *See, e.g.,* OCC Conditional Approval No. 322 (July 30, 1999); OCC
    Conditional Approval No. 276 (May 8, 1998).

[^6]: *See* Interpretive Letter (May 13, 1975).

[^7]: *See, e.g.,* Interpretive Letter No. 742, *reprinted in*
    \[1996-1997 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 81,106
    (August 19, 1996).

[^8]: I note that the Bank will be a party to the escrow agreement(s),
    but its duties will be limited to those described above. Further, it
    appears the Bank has taken steps to indemnify itself and limit its
    exposure. From the materials provided and from our conversations
    with the Bank, it is our understanding that the Bank would not be in
    a partnership or joint venture with any of the other parties, but
    will be acting solely as a depository and engaging in those
    activities described.