October 23, 1997

Re: Financial Code Section 3800 – Core Banking Business/Noncore Banking Business

Dear Mr. __________:

This responds to your letter of September 24, 1997.

Your letter asked whether your client (“Bank”), a foreign (other state) bank, may engage in certain activities (the “Subject Activities”) at a facility it is licensed to operate in California pursuant to Article 3 (commencing with Section 3840), Chapter 22, Division 1 of the Financial Code. As discussed below, in our view, Bank may engage in the Subject Activities at a California facility.

You described the Subject Activities as follows:

“The Bank has inquired whether, given the recent changes in California Financial Code, it can now permit the officers located at the Facility, when acting upon instructions from an authorized officer of the Bank located at an out-of-state location, to execute loan documents on behalf of the Bank. The personnel of the Facility would perform representational functions and would prepare a credit analysis with respect to loans to be made by the Bank in California. However, the final credit decision would be made by the Bank at an appropriate office outside of California and the loan proceeds would be disbursed by the Bank to the borrower from an office of the Bank outside of California.”

The term “facility” is defined in Financial Code Section 3800(c) as any office of a foreign (other state) bank at which the bank engages in “noncore banking business” but at which it does not engage in “core banking business.”

The issue, therefore, is whether the Subject Activities constitute noncore banking business.

Noncore banking business is defined in Section 3800(e) as ” . . . all activities permissible for commercial banks or trust companies, except core banking business, and except those activities prohibited by law or determined by the commissioner by regulation or order not to be noncore banking business.”

Therefore, the Subject Activities are permissible at a facility if they are (1) permissible activities for a commercial bank, (2) not within the definition of core banking business, and (3) not excluded from the definition of noncore banking business by regulation or order of the Commissioner. Lending is clearly a permissible activity for commercial banks, and the Commissioner has not previously excluded the Subject Activities from the definition of noncore banking business. Therefore, our inquiry focuses on the second factor, namely, whether the Subject Activities constitute core banking business.

As relevant here, “core banking business” is defined in Financial Code Section 3800(b) as, ” . . . the business of receiving deposits, paying checks, making loans, and other activities that the commissioner may specify by order or regulation. . . .” (Emphasis added.)

As you point out, activities that constitute core banking business for purposes of Chapter 22 of the Banking Law closely parallel the activities delineated in 12 USC Section 36(j). That section defines the term “branch” as it relates to national banks. Section 36(j) provides in pertinent part:

“The term ‘branch’ as used in this section shall be held to include any branch bank, branch office, branch agency, additional office, or any branch place of business located in any State or Territory of the United States or in the District of Columbia at which deposits are received, or checks paid, or money lent. . . . ” (Emphasis added.)

The legislative history of Chapter 480 the Statutes of 1995, pursuant to which Chapter 22 of the Banking Law was enacted, makes clear that in structuring the definition of “core banking business” to parallel the definition of branch activities of a national bank, the Legislature intended to enable foreign (other state) banks to do at a facility in this state those things a national bank may lawfully do at a location which is not a branch of the national bank, at least to the extent that a foreign (other state) bank is not otherwise prohibited from engaging is such activity. By letter of October 18, 1995, Assemblyman Ted Weggeland transmitted to the Speaker of the Assembly, “. . . Explanatory Comments, dated October 16, 1995, [that] explain the reasons for, and the intent of, the provisions of AB 1482 (Weggeland), which was passed by the Legislature, signed by the Governor, and filed with the Secretary of State as Chapter 480 of the Statutes of 1995 on October 2, 1995.” The difference between core and noncore banking business is explained at Page 41 of the Explanatory Comments, as follows:

“Chapter 22 distinguishes between core and noncore banking business. The distinction and nomenclature are based on the decision of the United States Supreme Court in Clarke v. Securities Industry Association 479 U.S. 388. In that case the Securities Industry Association (the ‘SIA’) challenged the authority of Security Pacific National Bank to establish a discount brokerage affiliate. The SIA contended that discount brokerage activities constituted the general business of banking and, therefore, the offices of the discount brokerage affiliate would be branches of the bank subject to the geographical restrictions on branching. The court held that core banking functions consist of receiving deposits, paying checks, and lending money, but the court left open the possibility that other activities might also be determined to be core banking functions. The court also held that a national bank must conduct all ‘core banking functions’ at a headquarters or branch office but that incidental services (including discount brokerage services) need not be restricted to branch office locations.”

Since Chapter 22 of the Banking Law aims at creating a rough equivalence between core banking activities of national banks and core banking activities of foreign (other state) banks, it is appropriate to give due weight to the OCC’s interpretations of 12 USC Section 36 in construing the scope of the core banking activities enumerated in Financial Code Section 3800(b).

The OCC rulings you cited in your letter do not expressly focus on the issue of whether the signing of loan documents makes the place of signature a place where “money” is “lent” for purposes of 12 USC Section 36(j). Furthermore, we could find no opinion of the OCC or of any court which expressly addresses that issue. However, as you point out, the OCC has promulgated and codified at 12 CFR Sections 7.1003, 7.1004, and 7.1005, guidelines for construing where “money” is “lent” for branching purposes. Those sections provide:

Ҥ7.1003. Money lent at banking offices or at other than banking offices.

“(a) General. For purposes of what constitutes a branch within the meaning of 12 U.S.C. 36(j) and 12 CFR 5.30, ‘money’ is deemed to be ‘lent’ only at the place, if any, where the borrower in-person receives loan proceeds directly from bank funds:

(1) From the lending bank or its operating subsidiary; or

(2) At a facility that is established by the lending bank or its operating subsidiary.

“(b) Receipt of bank funds representing loan proceeds. Loan proceeds directly from bank funds may be received by a borrower in person at a place that is not the bank’s main office and is not licensed as a branch without violating 12 U.S.C. 36, 12 U.S.C. 81 and 12 CFR 5.30, provided that a third party is used to deliver the funds and the place is not established by the lending bank or its operating subsidiary. A third party includes a person who satisfies the requirements of §7.1012(c)(2), or one who customarily delivers loan proceeds directly from bank funds under accepted industry practice, such as an attorney or escrow agent at a real estate closing.

Ҥ7.1004. Loans originating at other than banking offices.

“(a) General. A national bank may use the services of, and compensate persons not employed by, the bank for originating loans.

“(b) Approval. An employee or agent of a national bank or of its operating subsidiary may originate a loan at a site other than the main office or a branch office of the bank. This action does not violate 12 U.S.C. 36 and 12 U.S. C. 81 if the loan is approved and made at the main office or a branch office of the bank or at an office of the operating subsidiary located on the premises of, or contiguous to, the main office or branch office of the bank.

Ҥ7.1005. Credit decisions at other than banking offices.

“A national bank and its operating subsidiary may make a credit decision regarding a loan application at a site other than the main office or a branch office of the bank without violating 12 U.S.C. 36 and 12 U.S.C. 81, provided that ‘money’ is not deemed to be ‘lent’ at those other sites within the meaning of §7.1003.”

In promulgating these guidelines, the OCC commented that Section 7.1004 constitutes a safe harbor, but that the key portion of a loan transaction for branching purposes is the location, if any, where a borrower in-person receives loan proceeds from bank funds. 61 FR 4849, 4851-4852.

The Subject Activities do not involve delivery of loan proceeds to a borrower at Bank’s facility in California. It, therefore, seems unlikely that the OCC would require a national bank to engage in such activities only at a branch. Furthermore, in our view, execution of loan documents by an employee of Bank’s facility appears to be a ministerial act. The employee has no discretion to grant approval of any loan, but merely executes loan documents upon instructions conveyed from officers of the Bank located at appropriate offices of the Bank outside of California. In other words, the decision to grant the loan is not made at the facility. Under these conditions, execution of the loan documents at the facility should not cause loans to be viewed as “made” at the facility.

Accordingly, in our view, the Subject Activities do not constitute core banking business for purposes of Financial Code Section 3800(b), and it is permissible for Bank to engage in such activities at a California facility.

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,

Commissioner of Financial Institutions


Senior Counsel


Help us improve the DFPI website! Share your feedback.


Last updated: Jun 28, 2019 @ 8:49 am