85-5

October 29, 1985

Re: Financial Code Section 3372

Dear Mr. ________:
This is in response to your letter of July 11, 1985.
The issue presented by the facts in your letter appears to be whether a loan to a partnership is considered to be a loan to an executive officer of the bank for the purposes of Financial Code Section 3372 if the spouse of the executive officer is a partner of the partnership.
Article 2 (commencing with Section 3370) of Chapter 18, Division 1 of the Financial Code, entitled “Loans to Executive Officers and Directors” was added by Chapter 975 of the Statutes of 1984, effective April 1, 1985. It was recently amended by Chapter 956 of the Statutes of 1985, effective September 26, 1985. Section 3372 of that Article incorporates certain provisions of Regulation O of the Federal Reserve Board (12 CFR Part 215) into the Banking Law including Section 215.5. Under Section 215.5(a), “no… bank may extend credit to any of its executive officers, and no executive officer of a . . . bank shall borrow from or otherwise become indebted to the bank,…” except under certain limited conditions and only up to certain amounts. Since the facts related in your letter do not fall within any of those exceptions, the issue at hand is whether the loans to the partnership would be considered “extensions of credit” to the executive officer within the meaning of Section 215.5.
Financial Code Section 3370 expresses the Legislature’s intent that the provisions of Regulation O that were incorporated into the Financial Code by Section 3372 should be interpreted so as to conform to “any interpretation issued by an official or employee of the Federal Reserve System duly authorized to issue the interpretation.”
The staff of the Federal Reserve Board has dealt with the issue of loans to spouses of executive officers in community property states in an opinion printed in the Federal Reserve Regulatory Service, numbered 3-1081.1. In that opinion, a bank in a community property state proposed to extend a loan in excess of the limitations on loans to executive officers in Regulation O to the spouse of an executive officer of the bank. The spouse had no separate property, and the loan proceeds were to be applied to a community property business managed by the spouse. The opinion concludes that the loan would not be deemed to have been made to the executive officer if the spouse was creditworthy, the proceeds of the loan were not transferred to or used for the direct benefit of the executive officer, and the loan was repaid from the income of the spouse. The opinion explains:
“Even though either spouse in a community property state may obligate the entire community and the executive officer appears to be indirectly obligated because the assets of the community would be attachable for repayment of the debt, the loan would not be an extension of credit to the executive officer since there is no evidence that the Congress or the Board intended to treat loans to spouses of executive officers differently in community property states and noncommunity property states.”‘
The opinion adds:
“Also, if the loan were made in good faith directly to the business for business purposes and repayment of the loans were to be made out of the income of the business, the loan would not be construed as an extension of credit to the executive officer; . . .”
Accordingly, a loan will not be construed by the Superintendent to be an “extension of credit to an executive officer of a bank where the executive officer’s liability is based only upon his/her spouse’s liability for such loan, if:
1. The proceeds of the loan are not transferred to, or used for the direct benefit of, the executive officer;
2. The loan is made in good faith directly to a business of the spouse of the executive officer;
3. The loan is to be repaid from the income of the spouse or the business to which the credit is extended; and
4. The principal obligor of the loan is creditworthy.
However, if the spouse of the executive officer “controls” (as defined in Section 215.2(b)) the partnership, or if the partnership otherwise falls within the definition of a “related interest” (Section 215.2(k)), the general prohibitions and restrictions set forth in Section 215.4 would be applicable to the partnership.
Under the foregoing guidelines, then, loans to the law partnership of ________, ________, ________ & ________ would not be construed to be extensions of credit to ________, an executive officer of ________, solely because ________ is married to one of the partners of that firm.
However, loans directly to ________ spouse for his personal use (e.g., a loan for an automobile not used strictly for business), would be considered to be extension of credit to ________, because the loan would not be made to her spouse’s business, and the proceeds of the loan would be used to acquire community property, thus directly benefiting ________.
Your letter also inquired about Financial Code Section 3370.5, as did a letter from ________ dated December 29, 1983. Please be advised that Section 3370.5 was repealed as of April 1, 1985. Therefore, issues concerning that section are now moot.
Thank you for your courtesy and patience in this matter. Please feel free to contact us if you have any further questions
Very truly yours,
LOUIS CARTER
Superintendent of Banks
By
CAROL L. MATSUNAGA
Counsel
CLM:aee