Rhode Island Department of Business Regulation
Banking Bulletin Number 2003-2
Prohibited Net Branches & Net Branching Arrangements
The Department of Business Regulation (“Department”) Division of Banking
(“Division”) is responsible for the licensing and regulation of various
activities as described in R. I. Gen. Laws §19-14-1 et seq. and §19-14.1 et
seq. (the “Licensing Statutes”), including lending and loan brokering
activities. It has come to the Division’s attention that some Rhode Island
licensed lenders and loan brokers are engaging in prohibited types of
“branch office” arrangements referred to as “net branches”. This Bulletin
provides guidance and clarification regarding the Division’s requirements
for branch offices of Rhode Island licensed lenders, small loan lenders and
Net Branch – A net branch is an office at which a lender, small loan lender
or loan broker allows a separate company, lender, small loan lender or loan
broker that does not hold a valid Rhode Island lender, small loan lender or
loan broker license, to originate loans under the Rhode Island licensed
lender, small loan lender or loan broker license.
Net Branch Arrangement – A net branch arrangement is an arrangement in which
a Rhode Island licensed person or entity enters into an agreement whereby
its designated branch manager has the appearance of ownership of the
licensee by, among other things, sharing in the profits and/or losses1,
establishing, leasing or renting the branch premises, entering into other
contractual relationships with vendors such as telephones, utilities, and
advertising, having control of a corporate checkbook, and/or exercising
control of personnel through the power to hire or fire such individuals. An
entity may be considered to be utilizing a net branch if the net branch
agreement requires the branch manager to indemnify the licensee for damages
from any apparent, express, or implied agency representation by or through
the branch’s actions or if the agreement requires the branch manager to
issue a personal check to cover operating expenses whether or not funds are
available from an operating account of the licensee.
The purpose of this bulletin is two-fold
Please be aware that violations of Chapter 19-14-1 et seq. may
result in serious penalties as delineated below
For lenders and loan brokers currently licensed, the Division is issuing
this Bulletin to clarify that “net branches” and “net branching
arrangements” are prohibited. It is a violation of state law for a Rhode
Island licensed lender, small loan lender or loan broker to pay, directly or
indirectly, a fee to any person or entity not properly licensed pursuant to
the Licensing Statutes.
For individuals or entities not yet licensed, please be advised that Rhode
Island Law prohibits any individual or entity not properly licensed from
receiving any fee(s) in connection with loan brokering activities described
under the Licensing Statutes.
For Rhode Island licensed lenders, small loan lenders and loan brokers, the
Division may initiate a license revocation or suspension proceeding pursuant
to R. I. Gen. Laws §§ 19-14-13 or 19-14-15 and/or seek forfeiture of
interest, fees and charges pursuant to R. I. Gen. Laws §§ 19-14-26 and
For individuals or entities not licensed, violations may result in the
issuance of a cease and desist order by the Department pursuant to R. I.
Gen. Laws §§ 19-14-23 and/or criminal penalties and fines pursuant to R. I.
Gen. Laws §§ 19-14-23, 19-14-26 and 19-14-26.1. Lenders, small loan lenders
and loan brokers should review their respective responsibilities under the
Licensing Statutes carefully and act accordingly. The Division will conduct
field and/or desk examinations to ensure compliance with these provisions.
Marilyn Shannon McConaghy, Esq.
Director, Department of Business Regulation
Effective Date: October 10, 2003
1 A branch manager’s compensation that is based upon
the net profit of the branch is an acceptable branch compensation
arrangement if the Licensee collects the revenue from the branch, pays the
branch expenses including the compensation of all employees of the Licensee
main and branch offices, and then pays the branch manager the remaining
revenues, if any, as a commission. The distinction between an acceptable and
unacceptable branch compensation plan is whether the Licensee pays the
expenses of the branch. If the Licensee pays the expenses, the arrangement
is acceptable. If, however, the expenses are paid by the branch manager from
a personal or non- Licensee account (or by some third party), the
arrangement is prohibited.
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