81-8

July 20, 1981

Re: ________ – Financial Code Section 1221
Dear Mr. ________ :
This is in reference to your letter of May 12, 1980 requesting clarification of Financial Code Section 1221.
Please forgive our delay in responding to your letter. Your question was whether leases of office furniture, fixtures, and equipment executed by individual business lessees to a company engaging in the leasing of such office furniture, fixtures and equipment constitute “commercial or business paper” as the term is used in Financial Code Section 1221 when such leases are assigned or rediscounted to a bank as security for loans made by the bank to such leasing company with full recourse.
A loan made by a bank to a leasing company such as you describe in your letter secured by office furniture, fixtures, and equipment leases which are assigned to the bank as security for the loans made by the bank to the leasing company with full recourse (“loan”) would not be regarded by the Department as constituting a “discount of commercial or business paper” as used in Financial Code Section 1221 because such a transaction would be regarded by the Department as bearing the attributes of an extension of credit and security transaction rather than a true sales transaction by assignment or discount of an asset to the bank.
Furthermore, should a state bank make a loan to a leasing company evidenced by a promissory note executed by the leasing company and the leasing company assigns to the bank the lease and the leasing company’s rights to payments under the leases as you describe in your letter as security for the loan, such loan would be considered an “obligation” as defined in Financial Code Section 1220(a) of one of the following parties to the transaction: Under certain circumstances leases may be subject only to the lending limits of Financial Code Section 1221 applicable to the maker of the lease. These circumstances would include the following:
The leasing company will be the maker of the note but will not be obligated to pay the note.
The bank will be looking to the leasee for payment of the loan made to the leasing company and the payments will be made directly to the bank.
The bank makes a full credit check of the lessee.
The bank’s credit files should reflect adequate credit information to justify a loan to the particular lessee.
The bank should take all necessary steps to perfect its security interest in the lease and the leased equipment under California law.
The bank should take appropriate action to ensure that there would not be an undue concentration of underlying collateral substantially dependent upon a limited area of economic activity.
The lease between the leasing company and the lessee must provide that the interest of the lessor is freely assignable.
The lease between the leasing company and the lessee must provide that the lessee waives all claims and offsets against any rents due and payable.
The principal amount of the loan and interest must be capable of being paid from the rent over the lease term. That is, the amount of the loan and interest may not exceed the total amount of the rental obligation under lease.
If one or more of the aforementioned circumstances are absent, the leasing company will be regarded as the obligor rather than the maker of the lease.
Additionally, the loan would be subject to Financial Code Section 1223 and would be considered unsecured unless there exists the required margin of liability to market value of the leased equipment and the collateral is eligible collateral under Financial Code Section 1223. Our reply to your second letter of May 12, 1981 will follow under a separate cover. Please contact us should you have any further questions.
Very truly yours,
RICHARD M. DOMINGUEZ
Superintendent of Banks
By
DIANA H. NISHIURA
Counsel
DHN:
cc: State Banking Department, S.F.

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