Modern Methods of Making Loans Challenge Regulations

Article excerpt

Making loans seems to be a pretty straightforward and time-honored concept that ought to be well understood, especially among those in the banking industry.

But legal restrictions on where certain banking activities can take place have pushed the understandable into a quagmire in which only lawyers thrive.

In Oklahoma, the issue has been addressed in terms of what activities are allowed at the specialty facility known as loan production offices. These offices _ which unlike branches are not restricted by number or location _ allow banks to go to any market they choose to solicit loan business.

Loan production offices are not restricted presumably because they bring in money from elsewhere and stimulate the local economy. They are just the opposite of the worst characterization of a banker _ one that goes into a community and siphons off deposits to fund loans and thereby growth elsewhere.

Oklahoma law allows loan production offices to take loan applications, but loan decisions and funding cannot be made at those facilities.

The same is true for another type of limited-service banking office, known as the extended facility. Extended facilities are prohibited from making loans. State law allows banks to establish up to two such locations, one within 1,000 feet of the main bank and the other within three miles of the main bank.

Questions arise in the operation of these facilities when bankers seek to re-create their traditional business _ making loans _ in ways that fit with modern customers who demand convenience.

State bankers already jockeying for position in a highly competitive environment have used both loan production offices and extended facilities to gain entrance to markets that would otherwise be off limits due to the state's branching laws.

The actions are not limited to the large banks, either. Small-town banks with limited loan possibilities have opened loan production offices in urban areas to provide growth opportunities for their shareholders. For example, long before it acquired a branch in Oklahoma City, the First National Bank of Tonkawa had established a loan production office here.

As bankers try to make their products and services ever more convenient for customers of the '90s, they push the legal restrictions as far as they will bend _ without breaking out of compliance, of course.

While the state Legislature has pointed to the physical place where the loan decisions and funding are done to determine where a loan is "made," others see the whole thing as a process: Solicit customer, get application, analyze application, make decision on loan, fund it and disperse it. …