Loophole in interstate law offers benefits of branching in '95, nearly 2 years early.

WASHINGTON -- An obscure provision tucked away in the interstate banking law will permit banks and thrifts to enjoy many of the benefits of branching nearly two years before the new rules take effect.

Under the provision, affiliated banks and thrifts will be able to give each other a variety of services after Sept. 29, 1995.

"It gives you damn near everything you're looking for in interstate branching," said Bert Ely, a financial institutions consultant.

"You can actually simplify your operation a bit, since when you branch, you have to worry about tax and compliance issues," he added. "At the very least, it's a good way to ramp up toward interstate branching."

The provision lets a bank subsidiary of a holding company receive deposits and renew certificates of deposit and other time deposits for affiliated institutions. In addition, affiliated holding company subsidiaries can close, service, and receive payments for loans as agents for each other.

Some banks are taking a close look at the provision as a way to get an early start on the road toward interstate branching.

"The provision definitely looks attractive, based on my understanding," said Betty Riess, a spokeswoman for the Bank of America unit of BankAmerica Corp. "It definitely would be a step toward providing greater convenience to customers when traveling or working across state lines."

However, affiliate banks would not be allowed to open new deposit accounts, make credit decisions, or pay out loan funds.

"It's about relationships that are already established," said Mr. Ely. "You can't establish new legal relationships with this provision -- that's the key distinction -- but the payoff is that that banking company can present a seamless picture to the customer, no matter what state they are in."

Another big advantage is that banks needn't get regulatory approval to take advantage of the rule.

The affiliates provision is based upon a series of letters issued by the Comptroller of the Currency in 1992.

The Comptroller ruled, on a case-by-case approval basis, that a national bank could take various actions as an agent of an affiliated bank without being considered a branch of the affiliated bank.

"Before, this was tailor-made by the OCC, and now, it'll be right off the shelf," said James Mann, a partner in the Washington office of McDermott, Will & Emery. "The fact that this requires no prior regulatory approval is critical, especially if you've got CRA problems."

Under the new interstate branching law, states will have until June 1, 1997, to decide whether they want to pass their own branching laws, opt out of interstate banking, or pass laws granting their institutions parity with national banks.

By using the affiliates provision, institutions can circumvent states' opting out of interstate branching and still get many of the benefits the federal law would have provided, Mr. Mann added.

This fact may prompt states to forgo opting in to avoid some of the hassle involved in adopting interstate branching, according to Ellen Lamb, assistant vice president and director of member relations for the Conference of State Bank Supervisors.

"States may say, 'Why bother opting in?' since they can avoid all the tax issues that way," she said.

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