Opinion ID: 442169
Heading Depth: 1
Heading Rank: 1

Heading: Commercial Loans

Text: 11 The definition of commercial loans since 1970 was developed by regulatory agencies in determinations that particular transactions were not commercial loans under the Act. These exclusions have been explained by comparisons with the attributes of transactions generally accepted in the business as commercial loans. The rationalizations are not as important for our purposes as are the conclusions which were reached. This appeal in large part is concerned with money market and interbank transactions which heretofore were not considered to be commercial loans and which are defined as such by changes in Regulation Y. 12 There is no serious dispute that the term commercial loan was in common use and had a generally accepted meaning in 1970 both in the business and by all regulatory authorities, including the Board. There has been no change of this meaning in the business since that time, none evidenced by Congress, and no change by the regulatory agencies except the Board. The Board is thus alone in its new position and this is understandable because it was adopted with no reference to the actual meaning, but instead was adopted purely to carry out a new Board policy--to stop changes in the business of providing financial services--thus to bring a large number of additional enterprises under its jurisdiction by a change in definitions and so to accomplish this halt to change. In short, the new definition had nothing to do with the original meaning of the term nor the then current meaning, but instead was a device to accomplish an end--a change in the Board's jurisdiction. It was a device to freeze the changes in the business of financial services until the Board could persuade Congress to act. Congress had theretofore declined to adopt a moratorium proposed by the Board on changes which would also have used new definitions to accomplish the purpose. However, as a practical matter, with the new definitions there was more than a halt. It was to cause pervasive changes, thus to cause existing businesses to suddenly become bank holding companies and to necessitate reversal of acquisitions and to bring about divestitures; to change the investments permitted of state chartered savings and loans; and to have other consequences on existing business. It affected other regulatory agencies. For example, the changes required federal deposit insurance for entities which had insurance under state funds and other funds. It required entities to obtain such insurance which were not eligible for it. In short, the changes in definitions and the jurisdiction of the Board would cause extensive changes by other agencies and of course by some entities providing financial services to the public. 13 II. The Board since 1970 has taken a position on the relation of the Bank Holding Company Act to institutions engaging in all significant money market and interbank transactions. In each instance before 1982 the opinion or advice or ruling was that the transaction was not a commercial loan under the Act. Thus in a 1972 letter to the Federal Reserve Bank of Boston the Board, in reference to the Boston Safe Deposit Company, stated the sale of federal funds was not a commercial loan under the Act nor was the purchase of bankers' acceptances, certificates of deposit, or commercial paper. In 1976 the Board ruled that broker call loans were a passive medium of investment with no close lender-borrower relationship as existed with commercial loans under the Act. In 1980 the Board's Legal Division in a letter to the Federal Reserve Bank of Boston stated that the purchase on the secondary market of the guaranteed segment of SBH and Farmer's Home loans was not commercial lending. 14 In 1981 an internal memorandum (February 10, 1981) stated that the purchase of money market funds including certificates of deposit, bankers' acceptances and commercial paper were not commercial loans, nor were the purchases of federal funds nor were brokers' call loans commercial loans under the Act. 15 Later in 1981 the Board again evidenced the existence of its position expressed in the instances referred to above. In this transaction Associates First Capital Corporation purchased the Fidelity National Bank of Concord, California. Associates Corporation was owned by Gulf & Western, a nonbank corporation. The bank divested itself of its commercial loans. However, it remained in the money market and engaged in interbank transactions and the Board was of the view that these did not constitute commercial loans and Fidelity was not a bank under the Act. 16 What may fairly be described as the consistent policy or position of the Board described briefly above came to an end in December 1982. The Dreyfus Corporation considered the purchase of a nonmember state bank (Lincoln) insured by the FDIC. The proposal was to have the bank cease making commercial loans and to have it divest itself of such existing loans. The Board responded that Lincoln would nevertheless be a bank under the Act because in the Act the term commercial loans included the purchase of 17 commercial paper, bankers acceptances, and certificates of deposit, the extension of broker call loans, the sale of federal funds, the deposit of interest bearing funds and similar lending vehicles. 18 In Dreyfus the FDIC disagreed with the new position of the Board and permitted the acquisition of Lincoln under the conditions described. The FDIC in a letter of December 29, 1982 from the Deputy Chairman commented that the Board had dramatically re-cast the definition of commercial loan, and the FDIC was constrained to follow the clear legal precedents established over the years, and further commented that a change as expressed by the Board should be brought to the attention of Congress and not handled by agency action. 19 Also in Dreyfus the Comptroller as to a separate charter application stated that the inclusion of money market transactions within the BHCA term 'commercial loans' is not supported by the purpose or the legislative history of the BHCA, and referred to the Boston Safe matter. The Comptroller described as the money market transactions referred to were essentially a passive medium of investment and involved no close lender-borrower relationship and thus did not constitute a threat of the abuse sought to be met by the Act. 20 The Board Dreyfus letter (December 1982) was followed in May of 1983 by the Board's notice of the proposed changes in Regulation Y here considered. The changes by Regulation Y must be characterized as a complete reversal of the Board's previous position. The change was from white to black, from no to yes. It was not a modification or variation on the previous position nor did it seek to fill in some sort of gap. Money market transactions on one day were not commercial loans and the next day they were. This in itself does not sound so drastic, but the consequences sought to be visited thereby on a variety of financial institutions and their long-standing relationships and the regulatory authorities were indeed drastic. No party contends that the new definition is in accord with common usage. 21 III. The purpose of the reversal of position by the Board was, as already described, to stop the changes which were proceeding at a fast pace in businesses providing financial services. In order for the reversal to be effective the Board's authority had to be and was expanded to include institutions not theretofore within its jurisdiction as to all, or as to substantial parts of their activities. As also mentioned, this expansion of jurisdiction was very much more than just the prevention of future acquisitions, arrangements or affiliations. It was to cause divestitures of old acquisitions, sale of assets, changes in permitted uses of excess funds by state chartered and other institutions. It also was to have a drastic impact on many other types of business arrangements and on the way business was conducted, who could insure deposits and changes in regulatory authority from states to the feds. 22 Such a complete change and one which is a redefinition and expansion of jurisdiction by an agency requires that different standards be met than are demanded in a typical administrative redefinition not involving such elements. 23 One additional factor present here is the reason why the change was made. The departure from the accepted meaning or general usage prevailing at the time Congress passed the Act was not a consequence of any original error; nor of any change in trade usage; nor as a result of any signal from Congress; nor to coincide with the views of other regulatory agencies. Instead the change was to provide, by an expansion of jurisdiction, a regulatory device to change the course of the development of financial institutions which had taken place in conformance with the Act as construed by the Board from the outset. The Board since 1970 thus gave strong signals as to the definitions which created exceptions to the Act. The Gulf & Western decision was one of several such signals. 24 The new kinds of institutions which grew in number under the statutory-administrative provisions were well within the permitted exceptions, some formally approved, and cannot be considered as departures nor as evasions of the Act. A permitted exception cannot now be classified as an evasion as the Board would argue. 25 IV. The Act itself with the clearly expressed definitions permitted the development of the non-bank banks. The exceptions created by the definitions were based on industry usage, as mentioned, and contemplated that some institutions would not be included. An example is Boston Safe which was brought to the attention of the Senate by Mr. Robertson, head of the Board. The Board obviously knew what Boston Safe was doing. The statute thus anticipated exceptions, but apparently no one anticipated that the pressure for change in financial services would be as great and the business so volatile as it was in the years following. The problem has come not from the scope of the intended exceptions nor from the validity of the definitions, but from the prediction as to the numbers or volume within the exceptions. A prediction which probably no one could have accurately made, and the resulting problem, if it is that, could have been (or could be) resolved only by Congress should it perceive a need to act as in 1956, 1966 and 1970. 26 The changes which have come about cannot be characterized as evasions of the Act. The entities have followed the Act, and have followed the interpretation by the agency. There is nothing before us to indicate any violations of the regulations, and the Board has pointed out none. Early on in Boston Safe a strong signal was given as to what was permissible, and as late as Gulf & Western the Board demonstrated what still could be done. It is difficult to understand how the latter could be characterized as an evasion.