92-6

June 18, 1992

Dear Mr. ________:

This is in reply to your letter of

Under Financial Code Section 1226(c)(3), loans are exempt from the limits of Financial Code Section 1221 to the extent that they are covered by guarantees or by commitments to purchase without recourse made by an agency of the United States. The Small Business Administration is an agency of the United States. Small Business Act, Section 4(a); 15 U.S.C. Section 633(a). So also is the Export-Import Bank of the United States. Export-Import Bank Act of 1945, Section 2(a)(1); 12 U.S.C. Section 635(a)(1). It follows, therefore, that loans are exempt from the limits of Section 1221 to the extent that they are covered by guarantees or by commitments to purchase without recourse made by the Small Business Administration or by the Export-Import Bank of the United States.

Financial Code Sections 1224 and 1226(d) deal with different types of transactions. Section 1224 applies where a bank accepts a draft of the type described in that section. Section 1226(d) applies where a bank discounts a draft of the type described in that subdivision. Consequently, there is no conflict between Sections 1224 and 1226(d).

Under Section 1224, the aggregate limit on the amount of drafts of the type described in that section which may be accepted by a commercial bank and be outstanding at any time is 150 percent of gross capital (i.e., the sum of shareholders’ equity, allowance for loan losses, capital notes, and debentures) or, when authorized by the Superintendent of Banks, up to 200 percent of gross capital. As indicated by the last sentence of Section 1224(a), so long as drafts of the type described in Section 1224 are secured either by attached documents or by some other actual security growing out of the same transaction as the acceptance, the amount of such drafts that may be accepted and be outstanding at any time is not subject to any individual limit (i.e., limit based on the amount that one person is obligated to pay). Of course, however, the total amount of drafts of the type described in Section 1224 which may be accepted and be outstanding at any time, whether secured or unsecured, remains subject to the aggregate limit.

In accordance with the phrase set forth at the outset of Section 1224 (namely, “In addition to the limitations contained in Section 1221”), the amount of drafts of the type described in the section which are accepted by a commercial bank and are outstanding at any time is not subject to the limits set forth in Section 1221. In other words, “In addition to the limitations contained in Section 1221” should be read to mean, “Notwithstanding the limitations contained in Section 1221.” Also, the individual limit specified in the last sentence of Section 1224(a), which is triggered when a bank ceases to be secured either by attached documents or by some other actual security growing out of the same transaction as the acceptance, is instead of, and not cumulative of, the limitations set forth in Section 1221.

Incidentally, we are concerned that, when the unsecured limit in Section 1221(a) was increased from 10 percent of the gross capital to 15 percent of gross capital in 1983, the 10-percent limit set forth in the last sentence of Section 1224(a) should also have been increased. We intend to review this matter and, if necessary, sponsor legislation to conform the limit in the last sentence of Section 1224(a) to the unsecured limit in Section 1221(a).

In your letter, you refer to the limitations of Section 1221 as “25 percent unsecured and 35 percent secured to any one person.” To avoid any misunderstanding, we wish to note that the limits are 15 percent and 25 percent, respectively, and that the 25-percent limit covers the total of secured and unsecured obligations of any one person.

If we may be of further assistance, please feel free to contact us.

Very truly yours,

JAMES E. GILLERAN
Superintendent of Banks

By

JAMES F. CARRIG
Chief Counsel

JFC:idk

cc: State Banking Department, Los Angeles