07-1

07-1

May 24, 2007

Re: __________ – Opinion Request Regarding Financial Code Section 1226(i)

Dear __________:

This responds to your letter of April 13, 2007, and emails of May 16 and May 21, 2007. You have requested the Department’s determination as to whether Financial Code Section 1226(i) applies to __________’s (“Bank”) loan to __________ (“Borrower”).

As stated in your correspondence, Bank has issued a line of credit to Borrower, which is secured in cash. When Borrower wishes to draw on the line of credit, Borrower first makes a cash deposit (“Collateral”) in a segregated account with Bank’s wholly owned subsidiary, __________ (“Subsidiary”). Once Subsidiary receives the Collateral, Subsidiary deposits funds in the same amount with Bank via a 7-day inter bank placement sweep.

Pursuant to the terms of the Bank Account Charge agreement (“Agreement”) between Borrower and Bank, Borrower may not make any withdrawals from Collateral in the account at Subsidiary without the written consent of Bank. Furthermore, by a separate written agreement between Subsidiary and Bank, Subsidiary does not allow Borrower to withdraw any funds from Collateral without Bank’s prior written consent.

Financial Code Section 1221 sets forth the general legal lending limits applicable to banks. That is, the obligations of any one person cannot exceed the prescribed percentage of the sum of shareholders’ equity, allowance for loan losses, capital notes, and debentures of the bank. Our regulations provide instruction on how to calculate the amount of obligations. Of particular relevance to the current situation is Section 10.19107 of Title 10 of the California Code of Regulations. That section explains that obligations of a regulated corporation and its controlling subject institution shall be combined for lending limit purposes under Financial Code Section 1221.

Financial Code Section 1226(i) provides an exception to the lending limits of Financial Code Section 1221. In general, Section 1226(i) exempts obligations to the extent secured by a segregated deposit account in the lending bank and where the lending bank has established internal procedures to prevent release of the security without the lending bank’s prior consent.

In the instant case, Collateral is deposited with Subsidiary. Thus, the issue arises as to whether such Collateral is “in the lending bank.” We refer to Regulation Section 10.19107 for guidance. In that section, obligations of a regulated corporation and its controlling subject institution are combined for lending limit purposes. Thus, it follows that collateral for such obligations, which is held in a regulated corporation and its controlling subject institution, should be combined as well.

The Department therefore concludes that where collateral is held in a wholly owned subsidiary bank and where collateral is controlled by the parent bank, the collateral is considered to be “in the lending bank” for purposes of Section 1226(i). Furthermore, we find that Bank and Subsidiary have provided evidence of internal procedures and agreements designed to prevent the unauthorized release of collateral. For these reasons, it is the Department’s conclusion that the line of credit described above complies with Financial Code Section 1226(i).

Please be advised that our position is based solely on the representations contained in the correspondence referenced above. Any change in the facts or circumstances, as we understand them, could lead to a different conclusion.

Very truly yours,

JENNIFER L.W. RUMBERGER

Senior Counsel

JLWR:lca

cc: Scott Cameron

Debie Abella

VIA UPS OVERNIGHT MAIL

April 13, 2007

Ken Sayre-Peterson

Attorney at Law

Department of Financial institutions

1810 13th Street

Sacramento, CA 95814

Re: __________Bank – Lending Limit

Dear Mr. Sayre-Peterson:

I am writing on behalf of ___________ Bank (“__________”) to seek your opinion on the interpretation of California Financial Code Section 1226(i). It is our belief that the loan __________ has made to __________ (“Borrower”) does not violate the lending limits set forth in California Financial Code Section 1221 because of the exception found in California Financial Code Section 1226(i). Below, please find a description of our transaction with Borrower.

__________ has issued Borrower a line of credit (“Line of Credit”) which is secured in cash by Borrower. When Borrower wishes to draw on the Line of Credit, Borrower first makes a cash deposit (“Cash Collateral”) in a segregated account with our wholly owned subsidiary, __________ (__________) Ltd. (” __________ Subsidiary”).

(Please note that __________ is __________ Subsidiary’s sole shareholder and all the officers and directors of __________ Subsidiary are __________ employees). Pursuant to the terms and conditions of the Line of Credit, Borrower may only draw an amount up to 95% of the Cash Collateral. Once __________ Subsidiary receives the Cash Collateral, and to ensure that the Cash Collateral is readily accessible by __________, __________ Subsidiary deposits funds in the same amount with __________ via a 7-day inter bank placement sweep. By written agreement between __________ and __________ Subsidiary, __________ Subsidiary does not allow Borrower to withdraw any funds from the Cash Collateral without __________’s prior written consent. From time to time, Borrower’s Line of Credit may exceed the lending limitation set forth in California Financial Code Section 1221(a) for unsecured obligations, but at no time has this Line of Credit exceeded the limitation set forth in California Financial Code Section 1221(b) for secured and unsecured obligations.

We are of the opinion that this Line of Credit falls within the exception found in California Financial Code Section 1226(i). While Borrower initially deposits the Cash Collateral with our subsidiary, the funds from the Cash Collateral are immediately transferred to __________. The Cash Collateral is deposited in a segregated account and __________ has set up internal procedures so that the security cannot be released without __________’s prior consent. At all times, the Cash Collateral is controlled by, and ultimately deposited with, __________. We believe that this transaction satisfies California Financial Code Section 1226(i) and we are therefore in compliance with the lending limitations set forth in California Financial Code Section 1221.

Thank you for your attention and consideration. Please do not hesitate to call me with any questions. You can reach me at __________.

Very truly yours,

SVP and Corporate Counsel

cc: Debie AbeIla, Department of Financial institutions

Louis Cheng, Federal Deposit Insurance Corporation