[Federal Register Volume 61, Number 185 (Monday, September 23, 1996)]
[Rules and Regulations]
[Pages 49654-49662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23986]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 24
[Docket No. 96-21]
RIN 1557-AB46
Community Development Corporation and Project Investments and
Other Public Welfare Investments
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: As part of its Regulation Review Program, the Office of the
Comptroller of the Currency (OCC) is revising its regulation governing
national bank investments designed primarily to promote the public
welfare. This final rule clarifies banks' authority; renumbers and
reorganizes sections of the regulation; modifies the test for
determining whether investments primarily promote the public welfare;
and simplifies the regulation's investment self-certification and prior
approval processes. This final rule reduces regulatory burden and
inconsistencies while enhancing the ability of national banks to make
community development and other public welfare investments.
EFFECTIVE DATE: October 23, 1996.
FOR FURTHER INFORMATION CONTACT: Karen Bellesi, Acting Deputy Director,
Community Development Division, (202) 874-4940; or Michele Meyer,
Senior Attorney, Community and Consumer Law Division, (202) 874-5750,
Office of the Comptroller of the Currency, 250 E Street, SW,
Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Background
The OCC has reviewed 12 CFR part 24 as part of its Regulation
Review Program (Program). Goals of the Program are eliminating
provisions that do not contribute significantly to maintaining the
safety and soundness of national banks or to accomplishing the OCC's
other statutory responsibilities, updating and modernizing the OCC's
rules where appropriate, and clarifying the OCC's regulations to convey
more effectively the standards the OCC seeks to apply. Consistent with
these goals, this final rule reduces regulatory burden on national
banks and clarifies the standards that the OCC applies to national
banks' community development and public welfare investment programs.
The Proposal
On December 28, 1995, the OCC published a notice of proposed
rulemaking (NPRM) (60 FR 67091) to revise 12 CFR part 24. Part 24
implements 12 U.S.C. 24(Eleventh), which authorizes national banks to
make investments ``designed primarily to promote the public welfare,
including the welfare of low- and moderate-income families and
communities (such as through the provision of housing, services, or
jobs),'' subject to certain percentage of capital limitations.
As initially written, part 24 placed predominant emphasis on
community development investments. Part 24 permitted national banks to
make investments in community development corporations (CDCs) and
community development projects (CD Projects), consistent with safe and
sound banking practices. Under part 24, banks could self-certify
certain community development investments. Investments that were not
eligible for self-
[[Page 49655]]
certification were subject to one of two prior approval processes. The
first required a bank to file an investment proposal, which the OCC
usually approved or disapproved within 30 days. The second consisted of
a five-day review period for investment proposals that the OCC had
previously approved for another bank.
In the NPRM, the OCC proposed replacing part 24's public welfare
test with modified criteria for determining whether an investment
promotes the public welfare, including a non-exhaustive list of
permissible public welfare activities. The NPRM also proposed
streamlining part 24's investment self-certification and prior approval
provisions. In addition, the NPRM removed redundant or otherwise
unnecessary provisions from the former rule and made several other
changes intended to improve the rule's clarity. Finally, the NPRM asked
for comment on whether the OCC should continue its policy of not using
part 24 authority as a basis for approving an investment that is
otherwise permissible under 12 U.S.C. 24(Seventh).
The Final Rule and Comments Received
The OCC received seven comments. Most commenters supported the
proposed changes. Comments were submitted by three national banks, one
savings bank, two trade groups, and one national non-profit
organization that provides support for local non-profit CDCs. As
discussed later in this preamble, several commenters supported the
proposal but suggested that the OCC make additional changes, and one
commenter opposed the proposed changes to the former rule's public
welfare test and self-certification provisions. The following
discussion summarizes these comments and the amendments to part 24.
Title
The NPRM proposed changing the title of part 24 from ``Community
Development Corporation and Project Investments'' to ``Community
Development Corporation and Project Investments and other Public
Welfare Investments.'' This change reflects the OCC's view that
national banks can promote the public welfare through a variety of
authorized investments, as described in Sec. 24.3, in addition to CDCs
and CD Projects. The OCC received no comments on this issue, and
accordingly adopts the proposed title change.
Authority, Purpose, and OMB Control Number (Sec. 24.1)
The NPRM proposed amending the ``purpose'' paragraph of the
regulation to reflect that CDCs and CD Projects that develop affordable
housing, foster revitalization and stabilization of low-and moderate-
income areas, or provide equity or debt financing for small businesses
are just some of the types of investments that a national bank can make
under part 24. The preamble to the NPRM emphasized that the OCC
continues to encourage national banks to make these types of
investments but also stressed that banks may undertake other kinds of
public welfare investments. The OCC received no comments specifically
on this proposed section. However, as discussed later in this preamble,
the OCC received comments on proposed Sec. 24.3 that resulted in
modifications to that section to provide that banks' part 24
investments benefit low- and moderate-income individuals, low- and
moderate-income areas, or other areas targeted for redevelopment by
local, state, tribal or Federal government. Consistent with the change
to Sec. 24.3, the OCC adopts proposed Sec. 24.1 with a modification to
the ``purpose'' paragraph to clarify that bank efforts to promote the
public welfare through small business investment or area revitalization
or stabilization must be targeted to low- and moderate-income areas or
other redevelopment areas.
Definitions (Sec. 24.2)
In keeping with the Regulation Review Program's goal of using
terminology consistently throughout the OCC's regulations, the NPRM
proposed the use of definitions and terms common to other OCC
regulations. For example, the definition of ``low-income and moderate-
income'' in the NPRM referred to the OCC's CRA Regulation (12 CFR part
25). One commenter supported the OCC's efforts to standardize various
definitions in its regulations, but voiced the concern that the CRA
definition of ``low-income and moderate-income'' was more restrictive
than the definition in the former part 24.
Under the former rule and the OCC's CRA regulation, low- and
moderate-income individuals are individuals whose incomes are less than
80 percent of the median income of the area in which they live. The
former rule defined low- and moderate-income areas slightly differently
from the OCC's CRA regulation, however. The former rule defined low-
and moderate-income areas as areas where at least 51 percent of the
residents are low- and moderate-income persons and families. The CRA
regulation defines low- and moderate-income areas as areas where at
least 50 percent of the families have incomes less than 80 percent of
the area median family income. 12 CFR 25.12. Thus, the CRA regulation
is slightly more expansive in its definition of low- and moderate-
income areas than the former rule. The OCC believes that the difference
between the two definitions is insignificant and that adopting the CRA
regulation definition of low-and moderate-income in this final rule
will enhance its clarity and reduce the burden associated with having
different definitions of the same terms in the OCC's regulations.
Accordingly, the OCC adopts the proposed definition of ``low-income and
moderate-income.''
The NPRM also proposed using the same definition of ``capital and
surplus'' as the OCC's Lending Limit Regulation, 12 CFR part 32, which
refers to components of capital that national banks calculate for
purposes of determining their risk-based capital under 12 CFR part 3.
The OCC received no comments on this section and, accordingly, adopts
the proposed definition of ``capital and surplus.''
The NPRM omitted the former rule's definitions of community
development limited partnership and community-based development
corporation as unnecessary further examples of vehicles that national
banks may use to make investments under this part. The OCC received no
comments on this proposed removal, and accordingly adopts the proposed
change. This change does not affect a national bank's authority to
invest in a community development limited partnership or community
based development corporation. Consistent with the requirements of this
part, a national bank may continue to invest in these and other
vehicles.
The NPRM proposed adding a definition of ``eligible bank'' that is
the same as the ``eligible bank'' definition proposed by the OCC for
corporate applications in its November 29, 1994 notice of proposed
rulemaking concerning 12 CFR part 5 (59 FR 61034). The NPRM proposed
allowing a bank to self-certify investments for purposes of part 24 if
it has a composite rating of 1 or 2 under the Uniform Financial
Institutions Rating System, has at least a satisfactory CRA rating, is
well capitalized, and is not subject to any current OCC enforcement
actions. One commenter suggested that the final rule limit self-
certification eligibility to only banks with outstanding CRA ratings.
The OCC declines to make this change for two reasons. First, part 24
[[Page 49656]]
investments represent an important mechanism for banks to improve their
CRA records. Second, limiting self-certification to banks with
outstanding CRA ratings would result in far fewer banks benefiting from
the streamlined self-certification processes proposed in the NPRM. The
OCC accordingly adopts the proposed definition of ``eligible bank''
with only a technical clarification that the definition applies to the
self-certification process.
The NPRM also clarified that a national bank that is at least
adequately capitalized and that has a composite rating of at least 3
with improving trends may submit a letter to the OCC's Community
Development Division requesting permission to self-certify investments.
The OCC received no comments on this clarification. Accordingly, the
final rule permits a national bank that is at least adequately
capitalized and that has a composite rating of at least 3 with
improving trends to submit a letter to the OCC's Community Development
Division requesting permission to self-certify investments.
In addition, in a change from the former rule, the NPRM proposed
permitting a bank that is subject to a current OCC enforcement action
to seek permission to self-certify investments. As explained in the
preamble to the NPRM, the OCC believes this modification is appropriate
in light of the final rule's expanded self-certification opportunities
for banks (See Sec. 24.6.) Accordingly, the final rule adopts this
change.
In addition, the NPRM proposed changing the definition of
``significant risk to the deposit insurance fund'' to include risk to
all Federal deposit insurance funds. The OCC received no comments on
this proposed section and, accordingly, adopts the proposed change.
Finally, the NPRM proposed making two changes concerning the small
business definitions in former part 24. First, the NPRM proposed
removing the definition of ``minority-owned small businesses'' because
these businesses are encompassed by the regulation's provisions
concerning all small businesses. Second, the NPRM proposed updating the
citation to the Small Business Administration regulations referenced in
the definition of ``small businesses'' in the former regulation. The
OCC received no comments on these proposed changes and, accordingly,
adopts them with the clarification that the definition of ``small
business'' includes minority-owned small business.
Public Welfare Investments (Sec. 24.3)
Former part 24 delineated a public welfare test that consisted of
four requirements. Under former Sec. 24.4, an investment in a CDC or CD
Project was designed primarily to promote the public welfare only if:
(1) the investment primarily benefited low- and moderate-income persons
and families or small businesses; (2) the investment addressed
community development needs not met by the private market in one or
more communities served by the bank; (3) there was nonbank community
involvement in the CDC or CD Project; and (4) the profits and
distributions from a CDC or CD Project were reinvested in activities
that primarily promote the public welfare.1
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1 On December 28, 1995, the OCC published a final rule
eliminating part 24's reinvestment requirement. 60 FR 67049.
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Based on the OCC's experience since it adopted part 24, the NPRM
proposed replacing the public welfare test with modified criteria for
determining whether an investment primarily promotes the public
welfare. That list retained the first element of the public welfare
test, the requirement for a primary benefit to low- and moderate-income
individuals or small businesses, but made clear that this benefit could
be provided in a variety of ways. For example, Sec. 24.3(a) of the NPRM
permitted banks to invest in affordable housing, community
revitalization projects, small business financing or ``other
activities, services, or facilities conducive to the public welfare.'
The list of public welfare investment criteria also modified the
private market financing and community involvement elements of the
current public welfare test. Proposed Sec. 24.3(b) required a bank to
demonstrate only that it was difficult, rather than impossible, to
obtain private market financing. Section 24.3(c) of the proposal also
required a bank to demonstrate community support for or participation
in a proposed investment, but, unlike the former rule, it did not
prescribe any particular method of demonstrating that support or
participation.2
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\2\ The former rule required a bank to demonstrate nonbank
community involvement in a CDC or CD project by indicating support
from the affected primary beneficiaries and representatives of local
government. In the case of a CD entity with a board of directors, a
bank was required to demonstrate such support by the composition of
the organization's board of directors.
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In addition, Sec. 24.3(d) of the NPRM permitted a bank to make an
investment that also benefitted an area outside those where the bank
provides its core banking services. However, the bank would still have
been required to demonstrate the extent to which its investment
benefits the communities where it provides these services. These
proposed revisions to the public welfare test reflected the OCC's
willingness to consider a wider range of public welfare investments
than under the former rule.
All but one of the commenters voiced strong support for the
proposed revisions to the public welfare test. The objecting commenter,
a national non-profit organization that provides support for local non-
profit CDCs, strongly supported the former rule and expressed concern
that the proposal undermines the intent of 12 U.S.C. 24(Eleventh),
because the revised criteria would discourage banks from taking on
difficult community development projects, such as those targeted to
low- and moderate-income areas where private market financing is
difficult to obtain. The OCC appreciates these concerns and has
modified Sec. 24.3 to clarify that investments must benefit low- and
moderate-income individuals, low- and moderate-income areas, or other
areas targeted for redevelopment by local, state, tribal or Federal
government. The OCC has also modified Sec. 24.3 to require that a bank
demonstrate that it is not reasonably practicable to obtain other
private market financing for a proposed investment. In addition, the
OCC agrees with the commenter's opinion that the phrase ``conducive to
the public welfare'' in proposed Sec. 24.3(a)(4) could be
misinterpreted by some readers as a lowering of the statutory
requirement that banks' investments must ``primarily promote the public
welfare.'' Accordingly, the OCC has revised Sec. 24.3(a)(4) to clarify
that all investments under this part must primarily promote the public
welfare.
Two commenters, although supportive of the proposed changes to the
community participation requirement, requested that the final rule
include a list of examples for demonstrating community support for, or
participation in, a proposed investment. Based on these comments, the
OCC has revised the community participation criterion to include the
following examples:
In the case of an investment in a CD entity with a board
of directors, representation on the board of directors by non-bank
community representatives with expertise relevant to the proposed
investment;
Establishment of an advisory board for the bank's
community development activities that includes non-bank community
representatives with expertise relevant to the proposed investment;
[[Page 49657]]
Formation of a formal business relationship with a
community-based organization in connection with the proposed
investment;
Contractual agreements with community partners to provide
services in connection with the proposed investment;
Joint ventures with local small businesses in the proposed
investment; and
Financing for the proposed investment from the public
sector or community development organizations.
The OCC emphasizes, however, that these examples are by no means
exhaustive; banks and their community partners may determine other
acceptable ways to demonstrate community support for, or participation
in, investments under this part.
To improve clarity, the final rule reverses the order of the
sections concerning community participation and benefit to communities
otherwise served by the bank. Thus, the community participation section
is now set forth at Sec. 24.3(d) of the final rule, and the section
concerning benefit to communities otherwise served by the bank is set
forth at Sec. 24.3(c).
Finally, the NPRM proposed removing as unnecessary former
Sec. 24.4(e), which provided that a bank must manage its CDC and CD
Project investments in a prudent manner. The OCC received no comments
on the proposed removal and, accordingly, adopts the proposed change.
This change streamlines the regulation and, of course, reflects no
change in the applicable standard that national banks must manage their
part 24 investments--as with all their investments--consistent with
safe and sound banking practices.
Investment Limits (Sec. 24.4)
The former rule contained investment limit provisions at
Sec. 24.4(b) and (d). For ease of reference, the NPRM grouped the
provisions concerning part 24 investment limits into a separately
titled section. Section 24.4(a) of the NPRM clarified that, as provided
in 12 U.S.C. 24(Eleventh), a bank's aggregate outstanding investments
under part 24 may not exceed 5 percent of its capital and surplus
unless the bank is at least adequately capitalized and the OCC
determines, by written approval of a proposed investment, that a higher
amount, up to 10 percent, will pose no significant risk to the deposit
insurance fund.
One commenter suggested that the final rule permit an adequately
capitalized bank with assets up to $150 million to commit up to ten
percent of its capital and surplus to part 24 investments. As explained
earlier, however, the statute requires a bank to seek OCC approval of
investments that exceed 5 percent of capital. Accordingly, the OCC
adopts the statutory limitation proposed in the NPRM.
Public Welfare Investment Self-Certification and Prior Approval
Procedures (Sec. 24.5)
The NPRM proposed changes to the self-certification and prior
approval procedures set forth in Sec. 24.11 of the former rule. Former
Sec. 24.11 provided three processes for approval of authorized
investments. The first required a bank to file an investment proposal,
which the OCC usually approved or disapproved within 30 days. The
second process consisted of a five-day review period by the OCC for
investment proposals that the OCC had previously approved for another
bank. The third was a self-certification process for certain
investments, under which a bank filed a notice with the OCC within 10
days after it makes an investment, and the OCC sent a confirmation of
receipt within five days.
The NPRM proposed eliminating the second approval process. Thus,
under Sec. 24.5(a) and Sec. 24.6(a) of the NPRM, a bank would be
permitted to self-certify an investment previously approved by the OCC
for another bank. The preamble to the NPRM further provided that the
OCC will continue its practice of sending a simple confirmation of
receipt of a bank's self-certification notice within five days. The
NPRM also made clear that the OCC will not retroactively review a self-
certified investment proposal, but simply will review the self-
certification documents to ensure that they meet the self-certification
requirements set forth in Sec. 24.5(a). The OCC received no comments on
the proposed elimination of the approval process for investments
previously approved by the OCC for another bank and, accordingly,
adopts this change.
Section 24.5(b) of the NPRM sets forth the prior approval
procedures for investment proposals that do not qualify for self-
certification.3 In considering a bank's investment proposal under
the NPRM, the OCC will consider whether the investment satisfies the
requirements of Sec. 24.3 and whether it is consistent with the bank's
safe and sound operation and the OCC's policies. As explained in the
NPRM's preamble, the OCC will continue its practice of sending a simple
confirmation of receipt of an investment proposal within five days.
Consistent with the former rule, the NPRM permitted a bank, unless
notified otherwise by the OCC, to make a proposed investment 30
calendar days after the date on which the OCC received the bank's
investment proposal. The NPRM further provided that the OCC may notify
the bank that it is extending the review period. If so notified, the
bank could make the investment only with the OCC's written approval.
One commenter suggested that the final rule require that, within 30
days of the OCC's receipt of a bank's investment proposal, the OCC
notify the bank of the proposal's status by facsimile or telephone. The
OCC declines to include this level of detail in the final rule but will
endeavor to notify banks of proposal status as quickly as possible.
Accordingly, the OCC adopts the proposed procedures for prior approval
of investment proposals.
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3 The NPRM proposed removing the former rule's provision
for optional review as unnecessary. The OCC received no comments on
this proposed removal, and accordingly adopts the proposed change. A
national bank may, however, continue to request prior OCC review and
approval of any investment proposal, including one that qualifies
for self-certification.
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Former rule Sec. 24.11(b) contained a limit on the size of
investments eligible for self-certification by banks with more than
$250 million in assets. Those banks were required to seek prior OCC
approval for investments that exceeded the lesser of 2 percent of their
unimpaired capital and surplus or $10 million. The NPRM proposed
removing this additional limitation in light of the proposed new
standards that define the banks eligible to use the self-certification
process (discussed earlier). The OCC received no comments on this
proposed removal and, accordingly, the final rule adopts the proposed
change.
Investments Eligible for Self-Certification (Sec. 24.6)
Section 24.6 of the NPRM proposed replacing former rule Sec. 24.13,
which limited self-certification to investments using certain
structures as well as certain activities. These structures included
multi-bank CDCs; CDCs established by state or local government;
community-based organizations; and certain community development
limited partnerships. A CDC subsidiary was not an eligible structure
for self-certification.
The OCC believes that a structure-based self-certification
limitation is no longer necessary. This limitation was intended to
allow the OCC to ensure that particular investments did not expose
banks to safety and soundness risks or unlimited liability,
particularly relating to then-novel structures, such as limited
liability companies and CD
[[Page 49658]]
banks. However, since self-certification is limited to eligible banks
(as defined in Sec. 24.2(e) of the final rule), the OCC believes it is
reasonable to rely on bank management to determine the appropriate
structures for part 24 investments. The OCC received no comments on the
proposed elimination of the list of eligible structures and,
accordingly, adopts the proposed change.
In addition to eliminating the list of eligible structures,
Sec. 24.6(a) of the NPRM proposed an expanded list of activities
eligible for self-certification to reflect the industry's innovation in
part 24 investing and the OCC's experience with self-certification
under part 24. Part 24's self-certification provisions encourage
community development and other public welfare investments by banks by
reducing the regulatory steps associated with making the investments.
In order to maximize the use of self-certification as an incentive for
banks to make investments that primarily promote the public welfare,
and to encourage banks' creativity in making these investments, the OCC
identified in proposed Sec. 24.6(a) a clear and expanded list of
eligible activities. In addition to the former rule's list of eligible
activities, the NPRM's list included, but was not limited to, certain
investments that benefit low- and moderate-income persons and small
businesses, investments that previously have been determined by the OCC
to be permissible under part 24, and investments previously approved by
the Federal Reserve Board (FRB) under 12 CFR 208.21 for state member
banks.
One commenter suggested several changes to the proposed list of
activities eligible for self-certification. The commenter recommended
deleting from the list investments in an entity that acquires housing
for low- and moderate-income persons. The OCC believes, however, that
this activity, which was eligible for self-certification under the
former rule, promotes the public welfare and that permitting self-
certification of such investments is therefore consistent with the
statute and accordingly declines to remove it from the proposed list.
The commenter also requested that the list clarify that a bank may
self-certify investments as a limited partner, or as a partner in an
entity that it itself a limited partner, in a project with a general
partner that is, or is primarily owned and operated by, a 26 U.S.C.
501(c) (3) or (4) non-profit corporation and that qualifies for the
Federal low-income housing tax credit. The OCC agrees with this
suggestion and accordingly adopts the proposed clarification.
In addition, the commenter suggested that the final rule bar from
self-certification any bank that self-certifies an investment the OCC
later determines was ineligible for self-certification. The OCC
believes that this concern is addressed by the remedial action
provisions of proposed Sec. 24.7(c). Finally, the commenter objected to
the proposed inclusion of investments of a type approved by the FRB in
the list of eligible activities. The OCC believes that national banks
and the beneficiaries of their investments will benefit by the
increased flexibility and reduced burden associated with this
provision, but agrees that no investment can be self-certified, even if
that type of investment has been approved by the FRB, unless it meets
the criteria for public welfare investments set forth in Sec. 24.3.
Accordingly, this provision has been modified in the final rule.
As discussed earlier, the OCC has modified Sec. 24.3 to require
that bank investments be targeted to low- and moderate-income
individuals, low- and moderate-income areas, or other areas targeted
for redevelopment. The OCC has decided, however, to modify the list of
activities eligible for self-certification proposed in Sec. 24.6(a) of
the NPRM to clarify that a bank may self-certify an investment only if
it primarily benefits low- and moderate-income individuals or areas.
National banks must therefore submit for prior approval by the OCC
proposals for other types of investments. The distinction between what
is a permissible investment under Sec. 24.3 and what is eligible for
self-certification under Sec. 24.6 reflects the OCC's view that
investments targeted to low- and moderate-income individuals or areas
necessarily primarily promote the public welfare. Other types of
investments may primarily promote the public welfare also, but the OCC
believes that some prior review of such investments is an appropriate
means to ensure that they satisfy the criteria set forth in Sec. 24.3.
Accordingly, the OCC adopts the list of eligible activities proposed in
Sec. 24.6(a) of the NPRM with two modifications. The first modification
limits self-certification to investments that benefit low- and
moderate-income individuals or areas; and the second modification
reflects the commenter's suggestion concerning limited partnerships
investments.4
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4 In response to another commenter, the OCC clarifies that
permissible investments in a rural community in which a bank has its
main office or branch may be self-certified.
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Notwithstanding the activities eligible for self-certification
listed in Sec. 24.6(a), Sec. 24.6(b) of the NPRM provided that a bank
may not self-certify investments that involve properties carried on the
bank's books as ``other real estate owned'' (OREO properties) or that
fund projects outside the states or metropolitan areas in which the
bank's main office or branches are located. The latter limitation is
similar to the limit on self-certification that appears in former part
24 but was revised in the NPRM to reflect that some national banks now
have branches in more than one state. One commenter suggested that the
final rule permit self-certification of investments in portfolio
projects, such as regional funds that invest in affordable housing
projects located in several states, where no more than 25 percent of
the affordable housing projects are located outside the states or
metropolitan areas served by the bank. The OCC agrees that a bank
should not be discouraged from investing in innovative projects that
primarily benefit the communities it serves because a small portion of
the investment benefits other areas. Accordingly, under the final rule,
a bank may not self-certify an investment where more than 25 percent of
the investment funds projects in a state or metropolitan area other
than the states or metropolitan areas in which the bank maintains its
main office or branches. If a portion of a bank's investment funds
projects in areas outside of those in which the bank maintains its main
office or branches, the bank must certify under Sec. 24.5(a)(3)(vii)
that no more than 25 percent of the investment funds projects in a
state or metropolitan area other than the states or metropolitan areas
in which the bank maintains its main office or branches.
Examination, Records, and Remedial Action (Sec. 24.7)
The NPRM proposed replacing former Sec. 24.21, which set forth the
former rule's examination, records, and remedial action provisions,
with proposed Sec. 24.7 without substantive change. The OCC received no
comments on this proposed revision, and accordingly adopts the proposed
change.
Accounting for Public Welfare Investments (Current Sec. 24.4(c))
Section 24.4(c) of the former rule provided that a bank's
investments in CDCs and CD Projects generally could be recorded as
``other assets at cost.'' The former rule also set forth circumstances
under which a bank would be required to consolidate its investments on
a line-by-line basis or account for them under the equity method of
accounting. The NPRM proposed eliminating this section as
[[Page 49659]]
unnecessary, because banks generally look to other sources for their
accounting instructions. The OCC received no comments on this proposed
removal, and accordingly adopts the proposed change. Banks should
record their investments, as appropriate, pursuant to the instructions
for Consolidated Reports of Condition and Income published by the
Federal Financial Institutions Examination Council.
Policy Issue Regarding Dual Sources of Authority
In the past, the OCC has not used 12 U.S.C. 24(Eleventh), as
implemented by part 24, to approve activities permissible under other
provisions of the National Bank Act, 12 U.S.C. 1 et seq. This position
was intended to prevent banks' activities from being subjected
unnecessarily to part 24's limitation on the amount of capital a bank
may commit to community development and public welfare investments. For
example, a bank could make certain affordable housing loans under both
12 U.S.C. 24(Seventh) and 24(Eleventh). If the bank made such a loan
under the authority of 24(Eleventh), the loan would be subject to a
capital limitation that is stricter than the generally applicable
lending limits. Because the bank would have used unnecessarily some of
its limited part 24 authority to make a loan that is also permissible
under 24(Seventh), the bank would be left with less capital to commit
to investments that are permissible only under part 24. Therefore, the
OCC would usually conclude that 24(Seventh) provided the authority for
the loan. This position, however, does not reflect the OCC's general
approach of allowing banks to decide how best to structure their
investments.
The NPRM requested comment on whether the OCC should continue its
policy of not using part 24 as a basis for approving activities
otherwise permissible under the National Bank Act. One commenter opined
that part 24 provides limited authority that should be restricted only
to those activities motivated by concern for the public welfare, rather
than regular business considerations. The OCC believes that part 24
affords banks the opportunity to implement activities that supplement
and enhance otherwise permissible activities but may, in some cases,
provide authority that overlaps with other authority under the National
Bank Act. The OCC has decided that, where a choice is available, a bank
will be permitted to choose whether an investment activity will be
undertaken pursuant to authority under 24(Seventh) or 24(Eleventh).
When a bank seeks to rely on 24(Eleventh), however, the OCC will advise
the bank that the proposed investment is permissible under both
authorities to ensure that the bank is aware of the full range of its
legal investment opportunities and of the effect of the applicable
investment limitations.
Derivation Table
This table directs readers to the provision(s) of the current
regulation, if any, upon which the proposed provision is based.
----------------------------------------------------------------------------------------------------------------
Revised section Original section Comments
----------------------------------------------------------------------------------------------------------------
Sec. 24.1....................... Sec. 24.1................................... Modified.
Sec. 24.2(a).................... Sec. 24.2(a)................................ Modified.
(b).......................... Sec. 24.2(m)................................ Substantial change.
(c).......................... Sec. 24.2(b)................................ Modified.
(d).......................... Sec. 24.2(e)................................ Modified.
(e).......................... ............................................. Added.
(f).......................... Sec. 24.2 (g) ,(h).......................... Substantial change.
(g).......................... Sec. 24.2(k)................................ Modified.
(h).......................... Sec. 24.2(l)................................ Modified.
Sec. 24.2(c)................................ Removed.
Sec. 24.2(d)................................ Removed.
Sec. 24.2(f)................................ Removed.
Sec. 24.2(i)................................ Removed.
(i).......................... Sec. 24.2(a)................................ Modified.
Sec. 24.2(j)................................ Removed.
Sec. 24.3....................... Sec. 24.4(a)................................ Substantial change.
Sec. 24.4....................... Sec. 24.4 (b), (d).......................... Modified.
Sec. 24.4(c)................................ Removed.
Sec. 24.4(e)................................ Removed.
Sec. 24.5(a).................... Sec. 24.11(a)............................... Substantial change.
(b).......................... Sec. 24.11 (b), (d), (e).................... Substantial change.
Sec. 24.11(c)............................... Removed.
Sec. 24.6(a).................... Sec. 24.13(b)............................... Substantial change.
(b).......................... Sec. 24.11(b)............................... Modified.
Sec. 24.13(a)............................... Removed.
Sec. 24.7....................... Sec. 24.21.................................. Modified.
----------------------------------------------------------------------------------------------------------------
Regulatory Flexibility Act
It is hereby certified that this final rule will not have a
significant economic impact on a substantial number of small entities.
Accordingly, a regulatory flexibility analysis is not required. This
final rule will reduce the regulatory burden on national banks,
regardless of size, by replacing part 24's public welfare test with
modified criteria for determining whether an investment promotes the
public welfare, streamlining the self-certification and prior approval
sections of the rule, and eliminating unnecessary provisions. Although
beneficial, these changes will not have a material impact on affected
banks.
Executive Order 12866
The OCC has determined that this final rule is not a significant
regulatory action under Executive Order 12866.
[[Page 49660]]
Unfunded Mandates
The OCC has determined that this final rule will not result in
expenditures by state, local and tribal governments, or by the private
sector, of more than $100 million in any one year. Accordingly, a
budgetary impact statement is not required under section 202 of the
Unfunded Mandates Reform Act of 1995.
Paperwork Reduction Act of 1995
The collection of information requirements in this final rule are
found in 12 CFR 24.5. This information is required for the public
welfare investment self-certification and prior approval procedures.
The likely respondents are national banks.
Estimated average annual burden hours per respondent: 1.05 hours.
Estimated number of respondents: 400.
Estimated total annual reporting burden: 418 hours.
Start-up costs to respondents: None.
List of Subjects in 12 CFR Part 24
Community development, Credit, Investments, National banks,
Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set forth in the preamble, the OCC amends title 12,
chapter I, part 24, of the Code of Federal Regulations as set forth
below.
PART 24--COMMUNITY DEVELOPMENT CORPORATIONS, COMMUNITY DEVELOPMENT
PROJECTS, AND OTHER PUBLIC WELFARE INVESTMENTS
Sec.
24.1 Authority, purpose, and OMB control number.
24.2 Definitions.
24.3 Public welfare investments.
24.4 Investment limits.
24.5 Public welfare investment self-certification and prior
approval procedures.
24.6 Activities eligible for self-certification.
24.7 Examination, records, and remedial action.
Authority: 12 U.S.C. 24(Eleventh), 93a, 481 and 1818.
Sec. 24.1 Authority, purpose, and OMB control number.
(a) Authority: The Office of the Comptroller of the Currency (OCC)
issues this part pursuant to its authority under 12 U.S.C.
24(Eleventh), 93a, and 481.
(b) Purpose. This part implements 12 U.S.C. 24(Eleventh), which
authorizes national banks to make investments designed primarily to
promote the public welfare, including the welfare of low- and moderate-
income areas or individuals, such as by providing housing, services, or
jobs. It is the OCC's policy to encourage national banks to make
investments described in Sec. 24.3, consistent with safety and
soundness. The OCC believes that national banks can promote the public
welfare through a variety of investments, including those in community
development corporations (CDCs) and community development projects (CD
Projects) that develop affordable housing, foster revitalization or
stabilization of low- and moderate-income areas or other areas targeted
for redevelopment by local, state, tribal or Federal government, or
provide equity or debt financing for small businesses that are located
in such areas or that produce or retain permanent jobs for low- and
moderate-income persons. This part provides:
(1) The standards that the OCC uses to determine whether an
investment is designed primarily to promote the public welfare; and
(2) The procedures that apply to these investments.
(c) OMB control number. The collection of information requirements
contained in this part were approved by the Office of Management and
Budget under OMB control number 1557-0194.
Sec. 24.2 Definitions.
For purposes of this part, the following definitions apply:
(a) Adequately capitalized has the same meaning as adequately
capitalized in 12 CFR 6.4.
(b) Capital and surplus means:
(1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's
risk-based capital standards set out in Appendix A to 12 CFR part 3 as
reported in the bank's Consolidated Report of Condition and Income as
filed under 12 U.S.C. 161; plus
(2) The balance of a bank's allowance for loan and lease losses not
included in the bank's Tier 2 capital, for purposes of the calculation
of risk-based capital under Appendix A to 12 CFR part 3, as reported in
the bank's Consolidated Report of Condition and Income as filed under
12 U.S.C. 161.
(c) Community development corporation (CDC) means a corporation
established by one or more insured financial institutions, or by
insured financial institutions and other investors, to make one or more
investments that meet the requirements of Sec. 24.3.
(d) Community development Project (CD Project) means a project to
make an investment that meets the requirements of Sec. 24.3.
(e) Eligible bank means, for purposes of Sec. 24.5, a national bank
that:
(1) Is well capitalized;
(2) Has a composite rating of 1 or 2 under the Uniform Financial
Institutions Rating System;
(3) Has a Community Reinvestment Act (CRA) rating of
``Outstanding'' or ``Satisfactory''; and
(4) Is not subject to a cease and desist order, consent order,
formal written agreement, or Prompt Corrective Action directive (see 12
CFR part 6, subpart B) or, if subject to any such order, agreement or
directive, is informed in writing by the OCC that the bank may be
treated as an ``eligible bank'' for purposes of this part.
(f) Low-income and moderate-income have the same meanings as ``low-
income'' and ``moderate-income'' in 12 CFR 25.12(n).
(g) Significant risk to the deposit insurance fund means a
substantial probability that any Federal deposit insurance fund could
suffer a loss.
(h) Small business means a business, including a minority-owned
small business, that meets the qualifications for Small Business
Administration Development Company or Small Business Investment Company
loan programs in 13 CFR 121.301.
(i) Well capitalized has the same meaning as well capitalized in 12
CFR 6.4.
Sec. 24.3 Public welfare investments.
A national bank may make an investment under this part if:
(a) The investment primarily benefits low- and moderate-income
individuals, low- and moderate-income areas, or other areas targeted
for redevelopment by local, state, tribal or Federal government
(including Federal enterprise communities and Federal empowerment
zones) by providing or supporting one or more of the following
activities:
(1) Affordable housing, community services, or permanent jobs for
low- and moderate-income individuals;
(2) Equity or debt financing for small businesses;
(3) Area revitalization or stabilization; or
(4) Other activities, services, or facilities that primarily
promote the public welfare;
(b) The bank demonstrates that it is not reasonably practicable to
obtain other private market financing for the proposed investment;
(c) The bank demonstrates the extent to which the investment
benefits communities otherwise served by the bank; and
(d) The bank demonstrates non-bank community support for or
participation
[[Page 49661]]
in the investment. Community support or participation may be
demonstrated in a variety of ways, including but not limited to:
(1) In the case of an investment in a CD entity with a board of
directors, representation on the board of directors by non-bank
community representatives with expertise relevant to the proposed
investment;
(2) Establishment of an advisory board for the bank's community
development activities that includes non-bank community representatives
with expertise relevant to the proposed investment;
(3) Formation of a formal business relationship with a community-
based organization in connection with the proposed investment;
(4) Contractual agreements with community partners to provide
services in connection with the proposed investment;
(5) Joint ventures with local small businesses in the proposed
investment; and
(6) Financing for the proposed investment from the public sector or
community development organizations.
Sec. 24.4 Investment limits.
(a) Limit on aggregate outstanding investments. A national bank's
aggregate outstanding investments under this part may not exceed 5
percent of its capital and surplus, unless the bank is at least
adequately capitalized and the OCC determines, by written approval of
the bank's proposed investment(s), that a higher amount will pose no
significant risk to the deposit insurance fund. In no case may a bank's
aggregate outstanding investments under this part exceed 10 percent of
its capital and surplus.
(b) Limited liability. A national bank may not make an investment
under this part that would expose the bank to unlimited liability.
Sec. 24.5 Public welfare investment self-certification and prior
approval procedures.
(a) Self-certification of public welfare investments. (1) Subject
to Sec. 24.4(a), an eligible bank may make an investment described in
Sec. 24.6(a) without prior notification to, or approval by, the OCC if
the bank follows the self-certification procedures prescribed in this
section.
(2) To self-certify an investment, an eligible bank shall submit,
within 10 working days after it makes an investment, a letter of self-
certification to the Director, Community Development Division, Office
of the Comptroller of the Currency, Washington, DC 20219.
(3) The bank's letter of self-certification must include:
(i) The name of the CDC, CD Project, or other entity in which the
bank has invested;
(ii) The date the investment was made;
(iii) The type of investment (equity or debt), the investment
activity listed in Sec. 24.6(a) that the investment supports, and a
brief description of the particular investment;
(iv) The amount of the bank's total investment in the CDC, CD
Project or other entity, and the bank's aggregate outstanding
investments under this part, including commitments and the investment
being self-certified;
(v) The percentage of the bank's capital and surplus represented by
the bank's aggregate outstanding investments under this part, including
commitments and the investment being self-certified;
(vi) A statement certifying compliance with the requirements of
Sec. 24.3 and Sec. 24.4; and
(vii) If a portion of the investment funds projects outside of the
areas in which the bank maintains its main office or branches, a
statement certifying that no more than 25 percent of the investment
funds projects in a state or metropolitan area other than the states or
metropolitan areas in which the bank maintains its main office or
branches.
(4) A national bank that is not an eligible bank but that is at
least adequately capitalized, and has a composite rating of at least 3
with improving trends under the Uniform Financial Institutions Rating
System, may submit a letter to the Community Development Division
requesting authority to self-certify investments. The Community
Development Division considers these requests on a case-by-case basis.
(b) Investments requiring prior approval. (1) If a national bank or
its proposed investment does not meet the requirements for self-
certification set forth in paragraph (a) of this section, the bank
shall submit a proposal for an investment to the Director, Community
Development Division, Office of the Comptroller of the Currency,
Washington, DC 20219.
(2) The bank's investment proposal must include:
(i) The name of the CDC, CD Project, or other entity in which the
bank intends to invest;
(ii) The date on which the bank intends to make the investment;
(iii) The type of investment (equity or debt), the investment
activity listed in Sec. 24.3(a) that the investment supports, and a
description of the particular investment;
(iv) The amount of the bank's total investment in the CDC, CD
Project or other entity, and the bank's aggregate outstanding
investments under this part (including commitments and the investment
being proposed);
(v) The percentage of the bank's capital and surplus represented by
the bank's aggregate outstanding investments under this part (including
commitments and the investment being proposed); and
(vi) A statement certifying compliance with the requirements of
Sec. 24.3 and Sec. 24.4.
(3) In reviewing a proposal, the OCC considers the following
factors and other available information:
(i) Whether the investment satisfies the requirements of Sec. 24.3
and Sec. 24.4;
(ii) Whether the investment is consistent with the safe and sound
operation of the bank; and
(iii) Whether the investment is consistent with the requirements of
this part and the OCC's policies.
(4) Unless otherwise notified in writing by the OCC, and subject to
Sec. 24.4(a), the proposed investment is deemed approved after 30
calendar days from the date on which the OCC receives the bank's
investment proposal.
(5) The OCC, by notifying the bank, may extend its period for
reviewing the investment proposal. If so notified, the bank may make
the investment only with the OCC's written approval.
(6) The OCC may impose one or more conditions in connection with
its approval of an investment under this part. All approvals are
subject to the condition that a national bank must conduct the approved
activity in a manner consistent with any published guidance issued by
the OCC regarding the activity.
Sec. 24.6 Activities eligible for self-certification.
(a) Eligible activities. In accordance with the process described
in Sec. 24.5(a), a bank may self-certify the following investments
without prior notice to, or approval by, the OCC:
(1) Investments in an entity that finances, acquires, develops,
rehabilitates, manages, sells, or rents housing primarily for low- and
moderate-income individuals;
(2) Investments that finance small businesses (including equity or
debt financing and investments in an entity that provides loan
guarantees) that are located in low- and moderate-income areas or that
produce or retain permanent jobs, the majority of which are held by
low- and moderate-income individuals;
(3) Investments that provide credit counseling, job training,
community
[[Page 49662]]
development research, and similar technical assistance services for
non-profit community development organizations, low- and moderate-
income individuals or areas, or small businesses located in low- and
moderate-income areas or that produce or retain permanent jobs, the
majority of which are held by low- and moderate-income individuals;
(4) Investments in an entity that acquires, develops,
rehabilitates, manages, sells, or rents commercial or industrial
property that is located in a low- and moderate-income area and
occupied primarily by small businesses, or that is occupied primarily
by small businesses that produce or retain permanent jobs, the majority
of which are held by low- and moderate-income individuals;
(5) Investments as a limited partner, or as a partner in an entity
that is itself a limited partner, in a project with a general partner
that is, or is primarily owned and operated by, a 26 U.S.C. 501(c) (3)
or (4) non-profit corporation and that qualifies for the Federal low-
income housing tax credit;
(6) Investments in low- and moderate-income areas that produce or
retain permanent jobs, the majority of which are held by low- and
moderate-income individuals;
(7) Investments in a national bank that has been approved by the
OCC as a national bank with a community development focus;
(8) Investments of a type approved by the Federal Reserve Board
under 12 CFR 208.21 for state member banks that are consistent with the
requirements of Sec. 24.3; and
(9) Investments of a type previously determined by the OCC to be
permissible under this part.
(b) Ineligible activities. Notwithstanding the provisions of this
section, a bank may not self-certify an investment if:
(1) The investment involves properties carried on the bank's books
as ``other real estate owned'';
(2) More than 25 percent of the investment funds projects in a
state or metropolitan area other than the states or metropolitan areas
in which the bank maintains its main office or branches; or
(3) The OCC determines, in published guidance, that the investment
is inappropriate for self-certification.
Sec. 24.7 Examination, records, and remedial action.
(a) Examination. National bank investments under this part are
subject to the examination provisions of 12 U.S.C. 481.
(b) Records. Each national bank shall maintain in its files
information adequate to demonstrate that it is in compliance with the
requirements of this part.
(c) Remedial action. If the OCC finds that an investment under this
part is in violation of law or regulation, is inconsistent with the
safe and sound operation of the bank, or poses a significant risk to a
Federal deposit insurance fund, the national bank shall take
appropriate remedial action as determined by the OCC.
Dated: September 13, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-23986 Filed 9-20-96; 8:45 am]
BILLING CODE 4810-33-P
