[Federal Register Volume 59, Number 236 (Friday, December 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30160]
[[Page Unknown]]
[Federal Register: December 9, 1994]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 208
[Regulation H; Docket No. R-0838]
Membership of State Banking Institutions in the Federal Reserve
System
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Board is amending its Regulation H to implement a
provision of the Depository Institutions Disaster Relief Act of 1992
that authorizes state member banks to make investments designed
primarily to promote the public welfare to the extent permissible under
state law and subject to regulation by the Board. The amendment would
permit state member banks to make certain public welfare investments
without prior approval and other public welfare investments with
specific Board approval. The amendment also addresses the procedural
aspects of these investments.
EFFECTIVE DATE: January 9, 1995.
FOR FURTHER INFORMATION CONTACT: Stephanie Martin, Senior Attorney
(202-452-3198), Legal Division; Sandra Braunstein, Manager for
Community Affairs, (202-452-3378), Division of Consumer and Community
Affairs; Larry Cunningham, Supervisory Financial Analyst, Division of
Banking Supervision and Regulation (202-452-2701); for users of the
Telecommunications Device for the Deaf (TDD) only, Dorothea Thompson
(202-452-3544); Board of Governors of the Federal Reserve System,
Washington, DC 20551.
SUPPLEMENTARY INFORMATION: The Depository Institutions Disaster Relief
Act of 19921 amended the Federal Reserve Act2 to loosen the
restriction on the ability of state member banks to purchase, sell,
underwrite, and hold investment securities. The amendment allows state
member banks to make investments that are designed primarily to promote
the public welfare. The investment must not violate state law or expose
the bank to unlimited liability. The aggregate of the bank's public
welfare investments must not exceed the sum of five percent of the
bank's capital stock actually paid in and unimpaired and five percent
of its unimpaired surplus fund. The Board may waive this limit by
order, on a case-by-case basis, and permit a bank to make investments
in an amount not exceeding the sum of ten percent of the capital stock
actually paid in and unimpaired and ten percent of the unimpaired
surplus fund of the bank. Finally, the Board must limit a bank's
investments in any one project.
---------------------------------------------------------------------------
\1\Pub. L. 102-485, 106 Stat. 2771, 2774, section 6(b).
\2\Section 9, paragraph 23 (12 U.S.C. 338a).
---------------------------------------------------------------------------
In the past, the Board has dealt with requests by state member
banks to make public welfare investments on a case-by-case basis. To
reflect the recent Federal Reserve Act amendment and to facilitate
public welfare investments by state member banks, the Board is amending
Regulation H (12 CFR Part 208) by adding a new section entitled
Community Development and Public Welfare Investments. This amendment
will permit state member banks to make certain public welfare
investments without prior approval.
Summary of Final Rule
The final rule identifies classes of public welfare investments
that do not require prior approval, leaving less common investments and
investments of more than five percent of a bank's capital stock and
surplus subject to case-by-case review. Under the final rule, a state
member bank may make an investment, without prior approval, if the
investment previously has been determined to be a public welfare
investment by the Board or the Comptroller of the Currency or is an
investment in a community development financial institution as defined
in the Community Development Banking and Financial Institutions Act of
1994.3 In addition, the rule allows state member banks to invest
without prior approval in an entity established solely to engage in one
or more of the following activities: low- and moderate-income housing;
nonresidential real-estate development in a low- or moderate-income
area that is targeted towards low- and moderate-income persons; small
business development in a low- or moderate-income area; job training or
placement for low- and moderate-income persons; job creation in a low-
or moderate-income area for low- and moderate-income persons; and
technical assistance and credit counseling to benefit community
development.
---------------------------------------------------------------------------
\3\Title I of Pub. L. 103-325, 108 Stat. 2160, section 103(5).
---------------------------------------------------------------------------
The final rule uses the Department of Housing and Urban
Development's (HUD's) Chapter 69 Community Development definition of
low- and moderate-income persons and the Small Business
Administration's definition of small business. Low- or moderate-income
area is defined as an area in which the median family income is less
than eighty percent of the median family income of the Metropolitan
Statistical Area, or, for non-metropolitan areas, the state.
Under the final rule, the investment must not violate state law or
expose the bank to unlimited liability. The rule limits aggregate
public welfare investments without prior approval to up to five percent
of the capital stock and surplus of the state member bank and limits
any single investment without prior approval to not more than two
percent of a bank's capital stock and surplus. In addition, to make
public welfare investments without prior approval, a state member bank
must be at least adequately capitalized and rated a composite CAMEL
``1'' or ``2'' and at least ``satisfactory'' in its last consumer
compliance examination. In addition, the bank must not be subject to
any written agreement, cease and desist order, capital directive, or
prompt corrective action directive issued by the Board or a Federal
Reserve Bank acting under delegated authority. A state member bank must
receive Board approval before making an investment that falls outside
of the rule's parameters. In no event may aggregate public welfare
investments exceed ten percent of the bank's capital stock and surplus.
Within 30 days after making a public welfare investment without
prior approval, a state member bank must advise its Reserve Bank of the
amount of the investment and the identity of the entity in which the
investment is made. If a bank has a preexisting public welfare
investment on the rule's effective date that would not require prior
approval under the rule, the bank must notify its Reserve Bank of the
investment within sixty days after the effective date of the rule. For
other preexisting public welfare investments, the bank must apply to
the Board for approval of the investment within one year after the
rule's effective date.
If a public welfare investment ceases to meet the statutory
requirements or any requirements established by the Board in granting
approval, the bank must divest itself of the investment to the extent
that the investment ceases to meet those requirements. This divestiture
is governed by the same requirements as divestitures of interests
acquired by a lending subsidiary of a bank holding company or a bank
holding company itself in satisfaction of a debt previously contracted.
(See 12 CFR Sec. 225.140.) Divestiture is not required if the
investment ceases to meet the non-statutory requirements concerning
capital, examination ratings, and enforcement actions.
Summary of Comments and Section-by-Section Analysis
The Board proposed amendments to Regulation H regarding public
welfare investments by state member banks in May 1994 (59 FR 27247, May
26, 1994). The Board received nine public comments on the proposed
rule: four from trade associations, three from community development
organizations, and two from bank holding companies. The public comments
and the Board's responses to the comments are discussed in the section-
by-section analysis below.
Section 208.21(a)(1)
Definition of low- and moderate-income area. The Board proposed to
define ``low- and moderate-income area'' as an area in which the median
family income is less than eighty percent of the median family income
of the Metropolitan Statistical Area, or, for non-metropolitan areas,
the state. One commenter stated that ``low- and moderate-income area''
should include disadvantaged areas designated by statute as requiring
special government assistance that might not qualify under the proposed
definition.
The Board has addressed the concern that the proposed rule's
coverage was too narrow by amending Sec. 208.21(b)(1) to broaden the
universe of investments that are permissible without prior approval.
(This amendment is discussed below.) The Board has adopted the
definition as proposed.
Section 208.21(a)(2)
Definition of low- and moderate-income person. The proposed rule's
definition of ``low- and moderate-income person'' incorporated the
definition in Chapter 69 of the HUD statute on community development.
One commenter supported use of the HUD standard of 80% of median income
in defining the upper limit for qualifying investments. The Board has
adopted the proposed definition, with a minor citation correction.
Section 208.21(a)(3)
Definition of small business. The Board proposed to incorporate the
definition of ``small business'' as it applies to entities eligible for
financial or other assistance under the Small Business Administration's
Small Business Investment Company and Development Company programs. The
Board received no public comments on this definition and has adopted it
as proposed.
Section 208.21(b)(1)(i)-(iii)
Investments not requiring prior approval. The proposed rule
provided that state member banks could make an investment without prior
approval if the Board has determined the investment is a public welfare
investment or if the entity in which the bank invests engages solely in
one or more specified community development activities.
One commenter stated that the proposed standards were narrower than
the Federal Reserve Act's requirements and could exclude public-purpose
projects and mixed use projects where low- and moderate-income
residents are only some of the project's beneficiaries, particularly in
rural areas where low- and moderate-income families are not
concentrated.
In the final rule, the Board has broadened the scope of investments
that are permissible without prior approval. Specifically, a state
member bank may invest in an entity if the Comptroller of the Currency
(OCC) has determined, by order or regulation, that investment in that
entity by a national bank is a public welfare investment under section
5136 of the Revised Statutes (12 U.S.C. 24). This provision will
provide greater consistency in investments that are permissible for
state member banks and national banks and will eliminate the need in
many cases for determinations by two regulatory agencies. In addition,
under the final rule a state member bank may, without prior approval,
invest in a community development financial institution as defined in
section 103(5) of the Community Development Banking and Financial
Institutions Act of 1994. Congress has found that community development
financial institutions play an important role in promoting economic
revitalization and development in troubled communities and has
established a special fund to invest in and assist these institutions.
Therefore, the Board believes that investment in community development
financial institutions by state member banks should be considered
public welfare investments.
Additionally, under Sec. 208.21(d), the Board could make a general
determination for investments in entities engaged in a particular
activity. For example, if the Board determined that an investment in an
entity engaged in development activities in a federally-specified
enterprise zone was a permissible public welfare investment, it might
also determine that an investment in any similar entity engaged in
similar activities would not require prior approval.
Two commenters argued that the proposed restrictions were too
broad. These commenters stated that the prior approval exemption should
be provided only for those investments that address the needs of low-
and moderate-income persons and communities in ways not readily
available through the private market. These commenters suggested that
the Board add criteria similar to those in the OCC's rules on public
welfare investments. These commenters also suggested that a qualifying
public welfare investment should be required to include nonbank
community involvement to ensure that low- and moderate-income community
residents will benefit from the investment.
Generally, the ability to obtain funds in the private market is a
matter of price rather than access. The rate at which funding in the
private market would be prohibitive would vary with each project and
would be difficult to specify in a rule of general application. In
addition, the Board believes that the community development projects
described by the rule will usually have some form of community support.
The Board believes that any benefit in requiring a showing of non-bank
community involvement in a project would be outweighed by the
additional regulatory burden involved.
One commenter requested that the Board clarify that investments may
be made in either non-profit or for-profit community development
projects without prior approval. The final rule does not distinguish
between non-profit and for-profit investments. Either type of
investment is permissible as long as it meets the rule's requirements.
Section 208.21(b)(1)(iv)
The proposed rule provided that a state member bank could invest
without prior approval in an entity that engages solely in one or more
specified community development activities.
Engaged solely. Two commenters stated that requiring an entity to
engage solely in one of the specified activities is too restrictive.
The commenters noted that many companies invest in community
development but are diverse and multi-functional. One commenter
suggested that the Board substitute ``primarily'' for ``solely.'' The
Board believes that the term ``primarily,'' which could be interpreted
to mean 51 percent or even lower, is not narrow enough for purposes of
investments without prior approval. If a state member bank wishes to
invest in an entity that does not engage solely in the listed
activities, it may ask for a Board determination that the investment is
a public welfare investment. The Board has retained the ``solely''
language in the final rule.
Where the Board used the term ``primarily'' in the proposed rule,
it intended to cover those projects targeted towards low- and moderate-
income persons. The Board has substituted the phrase ``targeted
towards'' for ``primarily'' in the final rule (Sec. 208.21(b)(1)(iv)
(B) and (D)).
Indirectly engaged. One commenter asked that the Board clarify
whether the rule covers investment in a firm that engages in enumerated
activities through a wholly-owned subsidiary. The Board believes that
investment in an entity that engaged solely in the listed activities
through one or more subsidiaries would be permissible. The Board has
revised the final rule (Sec. 208.21(b)(1)(iv)) to clarify this point.
Lending activity. The Board has revised the rule to allow
investments without prior approval in entities engaged solely in public
welfare lending activities.
Section 208.21(b)(1)(iv)(A)
Investments in low- and moderate-income housing. The Board proposed
to allow investment without prior approval in entities that are engaged
in certain activities related to low- and moderate-income housing. The
Board specifically requested comment on whether low- and moderate-
income housing should be defined as housing where a majority of the
units are occupied by low- and moderate-income persons (as proposed) or
whether the definition should be based on other federal programs, such
as the low-income housing credit in section 42 of the Internal Revenue
Code. The Board received six public comments on this issue.
Three commenters supported the test proposed by the Board. One of
these commenters stated that section 42 of the Internal Revenue Code
should apply only if a corporation makes an investment in a housing
project specifically to benefit from a low-income housing tax credit.
Another of these commenters suggested that the rule's definition of
low- and moderate-income housing reflect the current HUD definition,
which stratifies the definition further to include very low income
designations.
One commenter stated that requiring a majority of residential units
to be occupied by low- and moderate-income persons would tend to
segregate the poor from people who could help them prosper. This
commenter suggested that the test should be satisfied by any housing
``occupied by low- to moderate-income persons,'' or if necessary,
including a low occupation threshold amount such as 15 percent.
Two commenters suggested that a qualifying investment should meet
the ``majority of units'' requirement as well as a requirement that
either (1) at least 20 percent of the units be occupied by individuals
whose incomes do not exceed 50 percent of area median income, or (2) at
least 40 percent of the units be occupied by individuals whose incomes
do not exceed 60 percent of the area median income, adjusted for family
size. The commenters believed that the additional restriction (which is
based on the definition of ``low-income housing project'' in the
Internal Revenue Code) would insure that qualifying investments would
provide a minimum level of benefit to low-income persons.
The Board believes that the additional restrictions on the test for
low- or moderate-income housing would not provide sufficient
flexibility in the final rule. However, the Board believes that tax
credits could provide a powerful incentive for banks to invest in low-
income housing. Therefore, the Board has adopted a revised version of
the low- and moderate-income housing provision that would allow
investment in residential property in which a majority of the units are
occupied by low- or moderate-income persons or that meets the
definition of a qualified low-income building under section 42 of the
Internal Revenue Code.
Section 208.21(b)(1)(iv)(B)
Investments in nonresidential real property. The Board proposed to
allow investment without prior approval in entities that are engaged in
certain activities related to nonresidential real property or other
assets located in a low- or moderate-income area and to be used
primarily by low- and moderate-income persons. Two commenters strongly
supported the inclusion of this category. Other than the revision to
the term ``primarily,'' the Board has adopted this provision as
proposed.
Section 208.21(b)(1)(iv)(C)
Small businesses in low- or moderate-income area. The Board
proposed to allow investment without prior approval in entities that
invest in small businesses located in a low- or moderate-income area to
stimulate economic development. Two commenters suggested that the Board
add emphasis on minority small businesses, which are an especially
underserved segment of the small business community. The Board believes
it would be difficult to determine what criteria to use to identify
disadvantaged small businesses and has not adopted this suggestion.
One commenter stated that the Board should permit investments in
all small businesses, as such investments would stimulate economic
development regardless of whether the businesses are located in low- or
moderate-income areas. The expansion of the types of investment
permissible without prior approval (Sec. 208.21(b)(1) (ii) and (iii))
should help address the concerns raised by this commenter. The Board
has adopted the provision as proposed.
Section 208.21(b)(1)(iv) (D) and (E)
Job training and employment opportunities. The Board proposed to
allow investment without prior approval in an entity that (i) invests
in, develops, or otherwise assists job training or placement facilities
or programs that will be used primarily by low- and moderate-income
persons or (ii) invests in an entity located in a low- or moderate-
income area if that entity creates long-term employment opportunities,
a majority of which will be held by low- and moderate-income persons.
The Board received no public comments on these provisions. Other than
the revision to the term ``primarily,'' the Board has adopted these
provisions as proposed.
Section 208.21(b)(1)(iv)(F)
Investments in credit counseling. The Board proposed to allow
investment without prior approval in entities that provide technical
assistance, credit counseling, research, and program development to
low- and moderate-income persons, small businesses, or nonprofit
corporations to help achieve community development. Two commenters
strongly supported the inclusion of this category. The Board has
adopted this provision as proposed.
Section 208.21(b)(2)
Permitted by state law. The Board proposed to allow investments
without prior approval only if the investment is permitted by state
law. The Board received no public comments on this provision and has
adopted it as proposed.
Section 208.21(b)(3)
Limited liability. The Board proposed to allow investments without
prior approval only if the investment will not expose the bank to
liability beyond the amount of the investment. The Board received no
public comments on this provision and has adopted it as proposed. This
provision would preclude a state member bank from acting as a general
partner. A general partner is normally liable for all of the debts of
the partnership, which could be greater than the partner's investment.
Section 208.21(b) (4) and (5)
Percentage of capital limitation. The Board proposed to allow
investments without prior approval only if the investment does not
exceed the sum of two percent of the bank's capital stock and surplus
and if the aggregate all such investments of the bank does not exceed
the sum of five percent of its capital stock and surplus. The Board
received no comments on this provision and has adopted it as proposed.
Definition of capital. The Board proposed to define capital stock
and surplus as it is defined in a Board interpretation on state member
bank undivided profits (12 CFR Sec. 250.162). One commenter suggested
that the Board define capital and surplus as total Tier 1 and Tier 2
capital, plus that balance of a bank's allowance for loans and lease
losses not included in Tier 1 and Tier 2 capital. The commenter stated
that this information can be easily gleaned from call report, would
ease compliance, and would be consistent with the OCC's proposed
definition of capital and surplus for purposes of lending limits. The
Board believes that the capital definition suggested by the commenter
is broader than anticipated by the ``capital and surplus'' language of
the statute. For many years, rules establishing limitations on the
activities of state member banks in terms of a bank's capital structure
have used a well-established definition of capital stock and surplus
that includes undivided profits plus allowance for loan and lease
losses. As these items are readily ascertained from the Schedule RC
Balance Sheet report (total equity capital (line 28); allowance for
loan and lease losses (line 4b), the Board has adopted the definition
of capital and surplus as proposed.
Section 208.21(b) (6)-(8)
Requirements regarding bank condition. The Board proposed to allow
investments without prior approval only if the bank is well capitalized
or adequately capitalized, received a composite CAMEL rating of ``1''
or ``2'' as of its most recent examination, and is not subject to any
written agreement, cease and desist order, capital directive, or prompt
corrective action directive issued by the Board or a Federal Reserve
Bank.
One commenter stated that CAMEL 3-rated institutions do not pose
the same risks to safety and soundness as 4- and 5-rated institutions.
The commenter suggested that an improving 3-rated institution with
adequate capital should be able to request a waiver from the Board to
forego the application process for future public welfare projects
(consistent with the OCC's public welfare investment rule). The Board
believes, however, that it would need to review a 3-rated bank's status
upon each public welfare investment request to determine whether the
bank was improving and that a blanket application waiver for improving
3-rated banks would not be appropriate.
The Board has made two revisions to the proposed provision. First,
the Board has expanded this provision to preclude investment without
prior approval by banks operating under a memorandum of understanding.
Second, the final rule will require a bank to have overall ratings of
at least ``satisfactory'' from its most recent consumer compliance
examination in order to make a public welfare investment without prior
approval.
Section 208.21(c)
Notice to Reserve Bank. The Board proposed to require a bank that
made an investment without prior approval to notify its Federal Reserve
Bank within 30 days of making the investment. The proposed notice would
include the amount of the investment and the identity of the entity in
which the investment is made. The Board received no public comments on
this provision and has adopted it as proposed.
Section 208.21(d)
The Board proposed that a state member bank would be able to make
public welfare investments other than those specified in the regulation
with prior Board approval.
Scope of public welfare investments. One commenter suggested that
the Board provide further guidance as to the boundaries of public
welfare investments that are not directly related to low- and moderate-
income communities or families. The Board's expansion of investments
permissible without prior approval should address this commenter's
concerns.
Application procedures. Three commenters suggested that the rule
should address application procedures and time limits for public
welfare investments. The Board has added provisions to Sec. 208.21(d)
to describe the minimum information that a public welfare investment
request should contain in order to enable the Board to determine
whether the investment would meet the Federal Reserve Act's
requirements. The final rule also provides that the Board will normally
act on requests within 60 days, unless the Board notifies the bank that
a longer period is necessary. Accordingly, a bank should request Board
approval of a public welfare investment at least 60 days prior to the
day the bank wishes to make the investment.
Section 208.21(e)
Divestiture. The Board proposed that a bank must divest itself of
an investment made in accordance with the regulation to the extent that
the investment exceeds the scope of, or ceases to meet, the
requirements of the regulation. The Board proposed that the divestiture
be made in the manner specified in Regulation Y for interests acquired
by a lending subsidiary of a bank holding company or the bank holding
company itself in satisfaction of a debt previously contracted. The
Board received no public comments on this provision and has adopted it
as proposed.
Section 208.21(f)
Preexisting investments. Under the Board proposal, if a state
member bank has an ongoing public welfare investment that would not
require prior approval under the regulation and was made prior to the
rule's effective date, the bank must notify its Federal Reserve Bank of
the investment within 60 days after the effective date. For other
ongoing investments made prior to the rule's effective date, the bank
must request Board approval within one year of the effective date. The
Board received no public comments on these provisions and has adopted
them as proposed.
Other Comments
Community Reinvestment Act
Three commenters requested that the Board address the relationship
between the proposed rule and banks' obligations under the Community
Reinvestment Act (CRA). One commenter was concerned that the new
investment levels would be interpreted as mandatory for state member
banks by some community groups and requested that the Board clarify the
role such investments should play in bank's overall CRA program.
Another commenter believed that public welfare investments should be
considered in assessment of a bank's CRA compliance in order to
encourage bank participation in lending consortia outside the bank's
delineated service area. A third commenter stated that the types of
investments envisioned in this rule should not supplant the bank's
responsibilities under the CRA.
The Board has determined not to refer to the CRA in this
regulation. The requirements of the CRA will continue to apply to state
member banks. Public welfare investments that are authorized under this
regulation may or may not qualify for CRA ``credit,'' depending on the
nature of the investment and the requirements of the CRA.
Regulation Y
Two commenters urged the Board to adopt a corresponding
interpretation to Regulation Y (12 CFR Part 225) so that the treatment
of bank holding companies and state member banks will be consistent.
The Board has adopted an interpretation to Regulation Y, published
elsewhere in today's Federal Register.
Capital Treatment
One commenter requested that the Board address the capital effects
of this proposal. The Board believes that public welfare investments
should not receive special accounting, capital, or examination
treatment.
Regulatory Flexibility Act Certification
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 605(b)), the Board certifies that the amendments to Regulation H
will not have a significant economic impact on a substantial number of
small entities, and that any impact on those entities should be
positive. The amendments will reduce the regulatory burden for many
state member banks by permitting them to make certain investments that
had previously required Board approval, and will have no effect in
other cases.
Paperwork Reduction Act
In accordance with section 3507 of the Paperwork Reduction Act of
1980 (44 U.S.C. 3507), the information collection has been reviewed by
the Board under the authority delegated to the Board by the Office of
Management and Budget (5 CFR Part 1320, Appendix A) after consideration
of the comments received during the public comment period.
The collections of information in this regulation are in 12 CFR
208.21. This information is required to allow oversight of state member
banks while permitting them to make certain public welfare investments.
This information will be used to track public welfare investments and
approve or deny certain new investments.
The estimated annual burden per respondent varies from 2 to 10
hours, depending on individual circumstances, with an estimated average
of 2.3 hours. There will be an estimated thirty-five respondents filing
investment notifications, averaging 2 hours, an estimated fifteen
respondents filing applications, averaging 2.5 hours, and an estimated
two respondents filing divestiture notifications, averaging 5 hours.
List of Subjects in 12 CFR Part 208
Accounting, Agriculture, Banks, Banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.
For the reasons set forth in the preamble, the Board is amending 12
CFR Part 208 as set forth below:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for Part 208 continues to read as
follows:
Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461,
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105,
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g),
78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318.
2. A new Sec. 208.21 is added to Subpart A to read as follows:
Sec. 208.21 Community development and public welfare investments.
(a) Definitions--(1) Low- or moderate-income area means:
(i) One or more census tracts in a Metropolitan Statistical Area
where the median family income adjusted for family size in each census
tract is less than eighty percent of the median family income adjusted
for family size of the Metropolitan Statistical Area; or
(ii) If not in a Metropolitan Statistical Area, one or more census
tracts or block-numbered areas where the median family income adjusted
for family size in each census tract or block-numbered area is less
than eighty percent of the median family income adjusted for family
size of the State.
(2) Low- and moderate-income persons has the same meaning as low-
and moderate-income persons as defined in 42 U.S.C. 5302(a)(20)(A).
(3) Small business means a business that meets the size eligibility
standards of 13 CFR 121.802(a)(2).
(b) Investments that do not require prior Board approval.
Notwithstanding the provisions of section 5136 of the Revised Statutes
(12 U.S.C. 24 (Seventh)) made applicable to State member banks by
paragraph 20 of section 9 of the Federal Reserve Act (12 U.S.C. 335), a
State member bank may make an investment, without prior Board approval,
if the following conditions are met:
(1) The investment is in a corporation, limited partnership, or
other entity:
(i) Where the Board has determined that an investment in that
entity or class of entities is a public welfare investment under
paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a),
or a community development investment under Regulation Y (12 CFR
225.25(b)(6));
(ii) Where the Comptroller of the Currency has determined, by order
or regulation, that an investment in that entity by a national bank is
a public welfare investment under section 5136 of the Revised Statutes
(12 U.S.C. 24 (Eleventh));
(iii) Where that entity is a community development financial
institution as defined in section 103(5) of the Community Development
Banking and Financial Institutions Act of 1994 (12 U.S.C. 4702(5)); or
(iv) Where that entity, directly or indirectly, engages solely in
or makes loans solely for the purposes of one or more of the following
community development activities:
(A) Investing in, developing, rehabilitating, managing, selling, or
renting residential property if a majority of the units will be
occupied by low- and moderate-income persons or if the property is a
``qualified low-income building'' as defined in section 42(c)(2) of the
Internal Revenue Code (26 U.S.C. 42(c)(2));
(B) Investing in, developing, rehabilitating, managing, selling, or
renting nonresidential real property or other assets located in a low-
or moderate-income area and targeted towards low- and moderate-income
persons;
(C) Investing in one or more small businesses located in a low- or
moderate-income area to stimulate economic development;
(D) Investing in, developing, or otherwise assisting job training
or placement facilities or programs that will be targeted towards low-
and moderate-income persons;
(E) Investing in an entity located in a low- or moderate-income
area if that entity creates long-term employment opportunities, a
majority of which (based on full time equivalent positions) will be
held by low- and moderate-income persons; and
(F) Providing technical assistance, credit counseling, research,
and program development assistance to low- and moderate-income persons,
small businesses, or nonprofit corporations to help achieve community
development;
(2) The investment is permitted by State law;
(3) The investment will not expose the State member bank to
liability beyond the amount of the investment;
(4) The investment does not exceed the sum of two percent of the
State member bank's capital stock and surplus as defined under 12 CFR
250.162;
(5) The aggregate of all such investments of the State member bank
does not exceed the sum of five percent of its capital stock and
surplus as defined under 12 CFR 250.162;
(6) The State member bank is well capitalized or adequately
capitalized under Secs. 208.33(b) (1) and (2);
(7) The State member bank received a composite CAMEL rating of
``1'' or ``2'' under the Uniform Financial Institutions Rating System
as of its most recent examination and an overall rating of at least
``satisfactory'' as of its most recent consumer compliance examination;
and
(8) The State member bank is not subject to any written agreement,
cease and desist order, capital directive, prompt corrective action
directive, or memorandum of understanding issued by the Board or a
Federal Reserve Bank.
(c) Notice. Not more than 30 days after making an investment under
paragraph (b) of this section, the State member bank shall advise its
Federal Reserve Bank of the investment, including the amount of the
investment and the identity of the entity in which the investment is
made.
(d) Investments requiring Board approval. (1) With prior Board
approval, a State member bank may make public welfare investments under
paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a),
other than those specified in paragraph (b) of this section.
(2) Requests for approval under this paragraph should include, at a
minimum, the amount of the proposed investment, a description of the
entity in which the investment is to be made, an explanation of why the
investment is a public welfare investment under paragraph 23 of section
9 of the Federal Reserve Act (12 U.S.C. 338a), a description of the
State member bank's potential liability under the proposed investment,
the amount of the State member bank's aggregate outstanding public
welfare investments under paragraph 23 of section 9 of the Federal
Reserve Act, and the amount of the State member bank's capital stock
and surplus as defined in 12 CFR 250.162.
(3) The Board will act on a request under this paragraph within 60
calendar days after receipt of a request that meets the requirements of
paragraph (d)(2) of this section, unless the Board notifies the
requesting State member bank that a longer time period will be
required.
(e) Divestiture of investments. A State member bank shall divest
itself of an investment made under paragraph (b), (d) or (f) of this
section to the extent that the investment exceeds the scope of, or
ceases to meet, the requirements of paragraphs (b)(1) through (b)(5),
or paragraph (d) of this section. The divestiture shall be made in the
manner specified in 12 CFR 225.140, Regulation Y, for interests
acquired by a lending subsidiary of a bank holding company or the bank
holding company itself in satisfaction of a debt previously contracted.
(f) Preexisting investments. (1) For ongoing investments made prior
to January 9, 1995 that are covered by paragraph (b) of this section, a
State member bank shall notify its Federal Reserve Bank of the
investment not more than sixty days after January 9, 1995.
(2) For other ongoing investments made prior to January 9, 1995, a
State member bank shall request Board approval not more than one year
after January 9, 1995.
By order of the Board of Governors of the Federal Reserve
System, December 2, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-30160 Filed 12-8-94; 8:45 am]
BILLING CODE 6210-01-P
