91-2
March 20, 1991
Re: Conflicts of Interest
Dear M ________:
This responds to your letters of December 27, and December 28, 1990, and January 24, 1991. In addition, this follows your letter of March 7, 1991.
You have presented several factual situations regarding the operation of ________. (“________”), and have asked us to determine whether any person involved in those situations has violated the conflict of interest provisions of the Business and Development Corporations Law contained in Article 1, Chapter 12 of Division 15 of the California Financial Code, commencing at Section 31800 (the “BIDCO Law”). The following shall address each factual situation separately.
The first factual situation involves the presentation of a loan application to ________ which was prepared by the wife of the chairman of ________ loan committee (the “Wife”). As we understand the situation, the Wife has received from the applicant a fee for the preparation of the application documents. In general terms, you have asked whether ________ or the Wife would violate the BIDCO Law conflict of interest provisions, commencing at Financial Code Section 31820; if ________ processed and funded the application.
To begin to answer your inquiry, we must first determine the Wife’s relationship to ________. As you describe ________ operations, the persons on the loan committee are unpaid volunteers who make decisions whether to approve loan guarantee applications. In that capacity, the loan committee members would appear to be providing advice to ________. Therefore, the loan committee members would meet the definitional test of “advisors” contained in Financial Code Section 31820(a). Pursuant to Financial Code Section 31820(b)(1), “advisors” to a licensee are considered “associates” of that licensee. In addition, Financial Code Section 31820(c) provides that spouses of “associates” of a licensee are also considered “associates” of the licensee. Accordingly, the Wife is an associate of ________.
Financial Code Section 31828 provides, in part, that “[i]t shall be unlawful for any associate of a licensee, directly or indirectly, to receive from any person to whom such licensee provides financing assistance, any compensation in connection with the providing of such financing assistance or anything of value for procuring, influencing, or attempting to procure or influence, the licensee’s action with respect to the providing of financing assistance.” (Emphasis added.) Thus, we must determine whether the loan package was prepared by the Wife for compensation and whether the loan Package is being used to procure or influence ________ action with regard to the application. It is obvious that the Wife has received for her work compensation in the form of a fee from the applicant. Further, and with respect to the question contained in numbered paragraph 1 of your December 27, 1990 letter, the loan package must be considered prepared “in connection with the providing of . . . financing assistance . . .” since it was prepared by the Wife to be used by the applicant to obtain a loan guarantee. Therefore, the Wife apparently will violate Section 31828 should ________ fund the loan guarantee. In anticipation of this determination, you have presented several rebuttal arguments in the form of questions. I will next address those arguments.
With respect to numbered paragraph 2, you ask whether the fees charged by the Wife can be considered “closing services” as defined by Financial Code Section 31820(d), and therefore be exempt from the penalty provisions of Section 31828. While the preparation of loan documents might be considered to be a “closing service” as defined by Section 31820(d), we do not need to consider whether the fee charged by the Wife meets the definitional test. The present facts do not meet the requirements of the “closing service” exemption contained in Section 31828. The last sentence of Section 31828 provides that “[t]his section shall not apply to the receipt by an associate of a licensee of fees for bona fide closing services performed by such associate; provided, however, that the associate is, with the consent and knowledge of the person to whom the financing assistance is provided, designated by the licensee to perform such services, that the services are appropriate and necessary in the circumstances, that the fees for the services are approved as reasonable by the licensee, and that the fees for the services are collected by the licensee on behalf of the associate.”‘
In this instance, the loan package was prepared prior to its submission to ________. Thus, the Wife was not designated by ________ with the knowledge of the loan applicant to perform the services she performed. In addition, there has been no showing that the services she performed were “appropriate and necessary” in the circumstances surrounding the loan application. In the same vein, ________ did not set the fees charged by the Wife, and it made no finding as to reasonableness of those fees. Finally, ________ did not collect the fees for the Wife. Accordingly, even if her activities could be defined as “closing services,” the Wife’s actions are not exempt from Section 31828. Additionally, with respect to numbered paragraph 4 of your letter, a refund of the Wife’s fee and a payment of a separate fee to the Wife by ________ would not satisfy the Section 31828 exemption. That proposal would do nothing to satisfy the requirement that the Wife was, with the consent and knowledge of the applicant, designated by ________ to perform the services she rendered.
With respect to numbered paragraph 3 of your letter, you have asked whether the Superintendent would grant an exemption for this transaction from the conflict of interest provisions of the BIDCO Law pursuant to Financial Code Section 31821. Based upon the representations contained in your letter dated March 7, 1991, pursuant to Section 31821, the Superintendent hereby exempts from the provisions of Section 31828 the Wife’s transaction as described in your letters, subject to the condition that the Wife’s husband cannot have participated in any manner in any discussion or determination regarding the application.
As we understand the second factual situation, one of the directors of ________ assists potential loan applicants of ________ in developing the applicant’s business plan. You are concerned that his acceptance of a fee from the applicant for that service violates the conflict of interest provisions of the BIDCO Law.
Pursuant to Section 31820(b)(2), a director of ________ is an “associate” of ________. Thus, the director could violate Section 81828 if, in connection with developing the business plan, he receives compensation for “procuring, influencing, or attempting to procure or influence the licensee’s action with respect to the providing of the financing assistance” to the loan applicant. While the business plan of a loan applicant may impact upon the underwriting of a loan guarantee, we understand from you that the business plans in question are not primarily developed in an effort to gain financing. Rather, financing is obtained to implement the business plan. Thus, based upon your letter, the director’s actions do not appear intended to procure or influence ________ actions with respect to providing financing assistance. Accordingly, I would not recommend to the Superintendent that he take enforcement action against the director in the above-described circumstances.
As we understand the third factual situation, some of ________ loan committee members are employed by banks. ________ guarantees loans generated by those employer banks. The employer banks receive loan fees and interest from those loans. You are concerned that this arrangement may violate Section 31828.
As discussed above, loan committee members are considered “associates” of ________. Pursuant to Section 31820(b)(2), the employers of the loan committee members are also considered “associates.” If the employers are receiving any compensation or anything of value for “procuring, influencing or attempting to procure or influence” ________ action regarding loan guarantees, the employers would violate Section 31828. It is unclear whether the above described transactions violate Section 31828. Your description of the transactions does not indicate whether the employers are receiving fees, interest, loan guarantees, or any other item of value for procuring, influencing or attempting to procure or influence ________ decisions regarding applications in the manner proscribed by Section 31828. Provided no exemption applies, if the fees, interest, loan guarantees or other items of value are received in connection with attempts by the employers to so influence ________ decisions, the banks would violate Section 31828.
In addition to possible violations of Section 31828 discussed above, you should also consider whether the banks activities may violate Financial Code Section 31827. Section 31827 provides, in part, that it shall “be unlawful for any licensee, directly or indirectly, to provide financing assistance to any person to whom any associate of such licensee provides financing assistance, either contemporaneously with, or within one year before or after, the providing of financing assistance by the licensee, if the terms on which the licensee provides financing assistance are less favorable to the licensee than the terms on which the associate provides financing assistance to the associate.” The second sentence of Section 31827 places the burden on the licensee to prove that the terms on which it provides financing assistance are at least favorable to it as the terms on which the associate “provided financing assistance to the associate.” The last sentence of Section 31827 provides that “this section shall not apply to any transaction effected by an associate of a licensee in the normal course of such associate’s business involving a line of credit or short-term financing assistance.”
It is unclear whether the above-described transactions fit within the exemption provided in the last sentence of Section 31827. Your description of the transactions does not indicate whether the transactions funded by the banks are made in the normal course of the banks’ business involving lines of credit or in providing short-term financing assistance. If the transactions are made in the normal course of the banks’ business involving lines of credit or short-term financing assistance, the exemption would appear applicable. If the transactions do not involve such business, ________ must determine whether its providing of financing assistance in those transactions is made on terms less favorable to ________ than the terms on which the banks provide financing assistance stanre ________
As we understand the final factual situation presented in your December 28, 1990 letter, several members of your loan committee are employed by non-profit corporations. Those non-profit corporations provide management and technical advice to potential loan applicants of ________. You are concerned that in providing those services for fees, the non-profit corporations are violating Section 31828 should the loan applicants seek financial assistance from ________.
As discussed above, the loan committee members of ________ are considered associates of ________. Pursuant to Section 31820(b)(2), the non-profit corporate employers of the committee members are also considered associates of ________. Thus, the actions of those non-profit corporations could constitute violations of Section 31828 if they receive any compensation for “procuring, influencing or attempting to procure or influence” ________ action with respect to providing financing assistance to loan applicants. Based upon your description, the providing of management and technical services to potential loan applicants does not appear to be an attempt to procure or influence ________ action with regard to loan guarantee applications. Accordingly, I would not recommend to the Superintendent that he take enforcement action against the employer non-profit corporations in the above-described circumstances. However, the other activities of those same employers which you describe in your January 24, 1991 letter may be a different matter. If the non-profit corporations’ activities include the preparation of applications, the corporations are involved in activities similar to those involving the Wife. If the non-profit corporations are receiving any compensation for preparing loan documents, and has granted the applications, the corporations would appear to have violated Section 31828, subject, of course, to applicability of the exemption provided in the last sentence of Section 31828, and subject to a definitive determination that such fees would qualify as “closing services” as defined in Section 31820(d). Finally, we decline to grant a blanket exemption for such transactions pursuant to Section 31821.
We trust that the foregoing has been of views expressed in this letter are based made in your letters. Please be advised that the solely on the facts and representations that any different facts or conditions. You should note might require different conclusions.
Very truly yours,
JAMES E. GILLERAN
Superintendent of Banks
By
KENNETH SAYRE-PETERSON
Counsel
KSP:aea/arc
cc: S. M. Cardenas
J. R. Paulus
J. E. Brodie
W. G. Thompson, Esq.