Can a Maryland savings bank develop real estate through a limited partnership?

Plain-English summary

In 1987, Maryland's Bank Commissioner asked the Attorney General about a state-chartered mutual savings bank that had been reviewed as part of a merger application. The Commissioner had discovered that the savings bank was a 50 percent limited partner in a partnership formed to buy and develop 15 single-family residential lots, and had also loaned the partnership money. The question was whether a Maryland savings bank could engage in that kind of real estate development, and if so, through what corporate structure.

The Attorney General concluded that a Maryland-chartered savings bank could not own or develop real estate of that kind directly or as a limited partner, because the statute governing bank real estate ownership only allowed banks to hold property needed for their own business or acquired through debt collection. However, a separate statute let a state-chartered bank get approval from the Bank Commissioner to engage in any activity that a national banking association could engage in under federal law, and federal regulations let a federal savings bank's service corporation engage in real estate development, subdivision, and resale activities. Because Maryland law let banks form service corporations, the opinion concluded a Maryland savings bank could pursue the same real estate development activities as a federal savings bank, but only by forming and using a bank service corporation approved by the Bank Commissioner, not by holding an interest in a limited partnership.

Currency note

This opinion was issued in 1987. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Could a Maryland savings bank invest in a real estate development partnership in 1987?
According to this opinion, no. The Attorney General concluded that Maryland's bank real estate statute, FI §5-503, did not authorize a state-chartered savings bank to hold an interest in a limited partnership formed to acquire and develop residential lots.

How could a Maryland savings bank lawfully engage in real estate development under this opinion?
The opinion concluded a savings bank could do so only through a bank service corporation approved by the Bank Commissioner under FI §5-504 and FI §5-405, mirroring the real estate development activities that federal regulations allowed a federal savings bank's service corporation to perform.

Background and statutory framework

The opinion started from FI §5-503, which limited a Maryland-chartered bank's real estate ownership to property needed for its own business or acquired through debt collection or foreclosure, a limitation the opinion read as extending to partnerships and other entities partly owned by the bank so the restriction could not be evaded through a different ownership form. It then turned to FI §5-504(a), which let a state-chartered bank, with the Bank Commissioner's approval, engage in any activity that a national banking association could engage in under federal law, and to the FI Article's definition of "national banking association" in FI §5-101(m), which the opinion read as covering both national banks and federal savings banks chartered under 12 U.S.C. §1464(a). Because federal savings banks were permitted, through a service corporation, to acquire and develop real estate under 12 C.F.R. §545.74(c), and because FI §5-405(b) let a Maryland bank form its own service corporation, the opinion concluded a Maryland savings bank could reach the same real estate activities that a federal savings bank could, subject to the Bank Commissioner's approval and supervisory authority under FI §§5-405(c)(2) and (3) and 5-407.

Citations

Statutes:

• FI §5-503 (limits on a Maryland-chartered bank's ownership of real property)
• FI §5-503(b)(1) (property necessary for the bank's own business)
• FI §5-503(c)(1) (property acquired in satisfaction of a debt or at foreclosure sale)
• FI §5-504(a) (state-chartered bank may engage in activities permitted to national banking associations, with Bank Commissioner approval)
• FI §5-504(b) (Bank Commissioner approval requirement for additional activities)
• FI §5-101(m) (definition of "national banking association")
• FI §5-405(b) (authority of a Maryland bank to form a service corporation)
• FI §5-405(c)(2) and (3) and §5-407 (Bank Commissioner's supervisory authority over service corporation activities)
• 12 U.S.C. §21 (chartering of national banks)
• 12 U.S.C. §29 (limits on national bank real estate ownership)
• 12 U.S.C. §1464(a) (chartering of federal savings banks)
• 12 C.F.R. §545.74(c) and (c)(3) (federal savings bank service corporation real estate activities)
• 12 C.F.R. 545.74(b) (federal regulatory limits on service corporation activities)

Cases:

• Department of Banking of Mississippi v. Deposit Guaranty National Bank, 809 F.2d 266 (5th Cir. 1987)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1987/Volume72_1987.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

FINANCIAL INSTITUTIONS

Banks—Mutual Savings Banks—Real Estate Development Activities Permissible Through Service Corporation.

August 26, 1987

The Honorable Margie H. Muller
Bank Commissioner

You have requested our opinion on whether a mutual savings bank may engage in certain real estate development activities.

For the reasons given below, we conclude that a mutual savings bank may engage in these real estate development activities through a bank service corporation. It may not do so as a partner in a limited partnership.

I
Background

Your question arises in regard to the application of a State-chartered, federally insured mutual savings bank, to merge into a de novo trust company. The shares of the new bank will be acquired by an out-of-State bank holding corporation in conjunction with the merger transaction.1

In the course of reviewing the savings bank's application, you became aware that the savings bank is a limited partner in a partnership formed for the purpose of acquiring and developing 15 single family residential lots. The savings bank, in addition to being a limited partner, loaned the partnership funds for its activities. The savings bank has a non-voting interest in the partnership with no right to take part in the management, conduct, or control of the partnership's business and operations. The savings bank and the general partner each hold a 50 percent interest in the partnership.

II
Real Estate Ownership by Banks

State-chartered banks, including mutual savings banks, may "buy and hold real property only as provided in" §5-503 of the Financial Institutions Article ("FI" Article). In general, ownership is limited to property "that is necessary for the convenient transaction of [the bank's] business" [FI §5-503(b)(1)] or that the bank has acquired "[i]n satisfaction of a debt contracted in the course of its business" or "[a]t sale on a judgment, decree, or mortgage foreclosure under a security that it holds" [FI §5-503(c)(1)]. The participation of CentraBank in the partnership is not permitted by FI §5-503.2

However, "[notwithstanding any other provision of Titles 1 through 5" of the FI Article, State-chartered banks are also empowered, with approval of the Bank Commissioner, to "engage in any additional banking activity or bank related service in which, under federal law, national banking associations may engage." FI §5-504(a).3 The term "national banking association" is defined as "an institution that is incorporated under federal law as a bank." FI §5-101(m).

Two types of associations are "incorporated under federal law as a bank," national banks and federal savings banks. National banks are chartered pursuant to 12 U.S.C. §21. Federal savings banks are chartered pursuant to 12 U.S.C. §1464(a).4 Consequently, the term "national banking association" in FI §5-504(a) includes federal savings banks. See also Revisor's Note to FI §5-504, reprinted in Financial Institutions Article at 141 (1980).5 It follows that a State-chartered commercial bank may engage in the same activity as a national bank, and a State-chartered savings bank may engage in the same activity as a federal savings bank.6

At the present time, national banks are not permitted to own or develop real estate that is neither necessary to the conduct of the bank's business transactions nor obtained for a debt previously contracted. 12 U.S.C. §29. Consequently, State-chartered commercial banks do not have the authority to participate in real estate development, apart from their own business premises and real estate acquired for a debt previously contracted.

However, certain real estate activity is a permissible activity for federal savings banks. The pertinent federal regulation provides that "[a] service corporation in which a Federal [savings bank] may invest is permitted to engage in" various activities. 12 C.F.R. §545.74(c) (emphasis added). The activities permitted for a service corporation include:

"(i) Maintaining and managing real estate . . . (vi) Acquiring real estate for prompt development or subdivision, for construction of improvements, for resale or leasing to others . . . (viii) Acquiring improved real estate or manufactured homes to be held for rental or resale, or for remodeling, renovating or demolishing and rebuilding for sale or rental . . . ." 12 C.F.R. §545.74(c)(3).

Consequently, a State-chartered savings bank may engage in the same kinds of real estate activity through a service corporation.7 Maryland law authorizes a bank, including a savings bank, to form a service corporation. FI §5-405(b). Accordingly, any State-chartered savings bank that wishes to engage in the real estate activity that is described in 12 C.F.R. §545.74 must first obtain approval from the Bank Commissioner to form a bank service corporation. In this regard, the Bank Commissioner may limit service corporation activities, or refuse to permit activities, for supervisory reasons. See FI §§5-405(c)(2) and (3) and 5-407. Cf. 12 C.F.R. 545.74(b).

III
Conclusion

A State-chartered mutual savings bank is empowered to engage in the same real estate activities as a federal savings bank. However, these activities must be performed through a bank service corporation and not through a limited partnership.

J. Joseph Curran, Jr., Attorney General
Frank C. Bonaventure, Jr., Assistant Attorney General

Jack Schwartz
Chief Counsel
Opinions and Advice

1 The Federal Reserve Board has approved the application.

2 These limitations on the authority of a State-chartered bank to own real estate extend to legal entities that are wholly or partially owned by the bank. Otherwise, the statute would be defeated through mere manipulations of the form of ownership.

3 FI §5-504(b) requires the approval of the Bank Commissioner for an "additional activity or bank-related service."

4 When federal banking law refers to an "association", that term "means a Federal savings and loan association or a Federal savings bank chartered . . . under section 1464 of this title. ..."

5 A prior opinion of this office provides further support for this conclusion. The opinion interprets the scope of the predecessor to FI §5-308, which concerns service charges imposed by a "banking institution." In examining the term "bank" in former Article 11, §83, Attorney General Hammond opined that a savings bank was a "bank" as the term was used in former Article 11, §83. "To ascribe a more restrictive meaning to the word 'bank', as used in Section 83, seems to us unduly to limit the obvious intent and meaning of the Legislature." 34 Opinions of the Attorney General 88, 91 (1949).

6 This opinion does not address the question of whether commercial banks may exercise the powers of savings banks or vice versa if the operations and activities of one are the functional equivalent of the other. Cf. Department of Banking of Mississippi v. Deposit Guaranty National Bank, 809 F.2d 266 (5th Cir. 1987).

1 If, however, a savings bank converts to a commercial bank, the resulting commercial bank may only exercise the powers of that type of bank and not a federal savings bank.