97-15

Re: Financial Code Section 1208

Dear Mr. __________:

This responds to your letter of September 16, 1997. Your letter requests that we construe Section 1208 of the Financial Code as not prohibiting a bank from engaging in the business of brokering loans on real property. As discussed below, it is our view that Section 1208 does not constitute such a prohibition.

Section 1208 permits a bank to do two things, namely (1) act as an insurance agent or broker and (2) act as an agent or broker with respect to loans on real property located within 100 miles of the location of the bank. In both respects, the permission is limited to banks that (1) are located in a place the population of which does not exceed 5,000 persons according to the most recent census, and (2) were engaged in such business on October 1, 1949.

The question is whether by permitting a relatively limited range of real estate loan agency and brokerage activities for certain qualifying banks, Section 1208 impliedly prohibits a bank from engaging in any real estate loan agency and brokerage activity if the bank or the activity does not conform to the qualifications set forth in Section 1208.

We understand that prior to the date of your letter, Diana Nishiura, counsel for the Department, directed your attention to the case of Sanford v. Garamendi, 233 Cal.App.3d. 1109 (1991). To our knowledge, Sanford is the only case which interprets Section 1208.

As you point out in your letter, Section 1208 was enacted at a time when the law provided that banks had only such powers as were specifically conferred upon them by statute. The limited powers specified in Section 1208 were among the powers specifically conferred upon banks. However, in 1975, Section 206 of the Corporations Code was enacted to eliminate this limitation on the corporate powers of banks. Section 206, which became applicable to banks on January 1, 1979, provides, in pertinent part, : “[A] corporation subject to the Banking Law . . . may engage in any business activity not prohibited by the . . . statutes and regulations to which it is subject.” Therefore, specific statutory authority is no longer necessary to empower a bank to engage in an activity, if banks are not expressly or impliedly prohibited by law from engaging in the activity.

The court in Sanford made reference to Section 206 of the Corporations Code in holding that, respecting insurance agency and brokerage activity, Section 1208 is a specific grant of authority rather than an implied prohibition. 233 Cal.App.3d at 1121. The court, therefore, ruled that repeal of provisions of the Insurance Code which prohibited banks from being licensed as insurance agents or brokers left banks free to seek such licenses and, if licensed, to engage in the insurance agency or brokerage business.

As you also point out, Section 1208 provides treatment of agency and brokerage activities relating to real estate loans that is substantially parallel to its treatment of insurance agency and brokerage activity. It is, therefore, difficult to conceive that the Sanford court would have taken a different view of Section 1208 respecting real estate lending activity than it took toward insurance activity.

Accordingly, in our view, Section 1208 of the Financial Code does not implicitly prohibit a bank which does not conform to the qualifications set forth in the section, from engaging in business as a real estate loan broker.

The Department of Financial institutions administers, among other laws, the Banking Law (Division 1 (commencing with Section 99)) of the California Financial Code. We express no opinion in this letter as to any other law or regulation, state or federal.

If you have any questions, please feel free to contact me at (415) 263-8512.

Very truly yours,

CONRAD W. HEWITT
Commissioner of Financial Institutions

By

THOMAS M. LOUGHRAN
Senior Counsel

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