10-1

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10-1

April 27, 2010

VIA E-MAIL & U.S. MAIL

Re: Opinion Request

Dear ___________:
This letter is in response to the various communications with the Department of Financial Institutions (“Department”) regarding ___________.

The three issues are:

(1) whether a loan to ___________ collateralized by an assignment of the tobacco escrow deposits described in your letter of April 13, 2010, would be considered secured under Financial Code Section 1223;
(2) whether it would be permissible for a state chartered bank to purchase interests in certain tobacco escrow accounts; and
(3) whether such interests would be treated as an obligation under Financial Code Section 1221 or a security investment pursuant to Financial Code Section 1330.

Lending Limit
Financial Code Section 1221 limits the unsecured obligations of one person to 15 percent or less of the sum of the shareholders’ equity, allowance for loan losses, capital notes, and debentures of the bank. Financial Code Section 1223 provides that an obligation shall not be deemed secured by collateral unless the collateral is of a kind that has not been declared ineligible by the Commissioner and unless it has a market value at least 15 percent greater than the amount of the obligation. Section 10.190202 of the California Code of Regulations sets forth items that are ineligible as security under Financial Code Section 1223, including assigned accounts receivable. It is our view that the interests in tobacco escrow accounts are similar to assigned accounts receivable, and therefore, they are ineligible as security under Financial Code
Section 1223. Further, there is no ready market to determine the market value of the interests. Therefore, the proposed collateral also does not meet the second prong of Section 1223.

In sum, a loan to ___________ collateralized by an assignment of the tobacco escrow deposits would not be secured, and the loan would be limited to 15 percent or less of the sum of the shareholders’ equity, allowance for loan losses, capital notes, and debentures of the bank.

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Last updated: Jun 27, 2019 @ 5:52 pm