Activities and Operations of National Banks and Federal Savings Associations

Federal RegisterDec 22, 2020

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 4, 5, 7, 145, and 160

[Docket ID OCC-2020-0003]

RIN 1557-AE74

Activities and Operations of National Banks and Federal Savings Associations

AGENCY:

Office of the Comptroller of the Currency, Treasury.

ACTION:

Final rule.

SUMMARY:

The Office of the Comptroller of the Currency is issuing a final rule to revise and reorganize its regulations relating to the activities and operations of national banks and Federal savings associations and to amend its rules relating Federal savings association corporate governance. This rule clarifies and codifies recent OCC interpretations, integrates certain regulations for national banks and Federal savings associations, and updates or eliminates outdated regulatory requirements that no longer reflect the modern financial system. Additionally, this rule includes related technical changes throughout these and other OCC regulations.

DATES:

The rule is effective April 1, 2021.

FOR FURTHER INFORMATION CONTACT:

Beth Kirby, Assistant Director, Valerie Song, Assistant Director, Heidi M. Thomas, Special Counsel, or Chris Rafferty, Attorney, Chief Counsel's Office, (202) 649-5490, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

I. Background

The Office of the Comptroller of the Currency (OCC) periodically reviews its regulations to eliminate outdated or otherwise unnecessary regulatory provisions and, where possible, to clarify or revise requirements imposed on national banks and Federal savings associations.

The elimination of unnecessary regulatory impediments together with efforts to revise regulations to reflect changes in the financial industry help to promote economic growth for consumers, businesses and communities.

For example, the OCC recently issued a final rule relating to policies and procedures for corporate activities and transactions involving national banks and Federal savings associations, 12 CFR part 5, that updates and clarifies these policies and procedures and eliminate unnecessary requirements consistent with safety and soundness.

See

85 FR 80404 (Dec. 11, 2020).

These reviews are in addition to the OCC's decennial review of its regulations as required by the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA).

These reviews also consider, where appropriate, opportunities to integrate rules that apply to national banks with similar rules that apply to Federal savings associations in light of the transfer to the OCC of all functions of the former Office of Thrift Supervision (OTS) relating to Federal savings association by Title III of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Public Law 104-208 (1996), codified at 12 U.S.C. 3311(b). Section 2222 of EGRPRA requires that, at least once every 10 years, the OCC along with the other Federal banking agencies and the Federal Financial Institutions Examination Council (FFIEC) conduct a review of their regulations to identify outdated or otherwise unnecessary regulatory requirements imposed on insured depository institutions. Specifically, EGRPRA requires the agencies to categorize and publish their regulations for comment, eliminate unnecessary regulations to the extent that such action is appropriate, and submit a report to Congress summarizing their review. The agencies completed their second EGRPRA review on March 2017 and published their report in the

Federal Register

. 82 FR 15900 (March 30, 2017).

Public Law 111-203, 124 Stat. 1376 (2010) (transferring to the OCC all functions of the former OTS relating to Federal savings associations).

As part of this process, the Office of the Comptroller of the Currency (OCC) published a notice of proposed rulemaking (proposal or proposed rule) on July 7, 2020 to revise and reorganize subparts A through D of 12 CFR part 7, Activities and Operations.

The OCC proposed to update part 7 to address developing issues and industry practices, to clarify OCC interpretive positions, and to integrate certain national bank rules by adding Federal savings associations. As examples, the proposed revisions to subpart A included new regulations covering tax equity finance transactions, derivatives activities, and payment system memberships. The proposed revisions to subpart B addressed corporate governance issues, such as expanding the ability of national banks to choose corporate governance provisions under State or other law, clarifying permissible anti-takeover provisions, and adding provisions relating to capital stock-related activities of national banks. The OCC also proposed to update and integrate rules relating to bank hours and closings in subpart C and to update rules relating to loan production and deposit production offices and remote service units in subpart D and to move these sections to subpart A to improve the organization of part 7.

As a companion to the proposed rule, the OCC also issued an Advance Notice of Proposed Rulemaking (ANPR) inviting ideas for revisions on the OCC's rules on electronic banking activities located at subpart E of 12 CFR part 7 and 12 CFR part 155.

85 FR 40794 (July 7, 2020).

The OCC has separately issued a final rule that amends 12 CFR 7.4001.

See

84 FR 33530 (June 2, 2020) (Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred). The OCC also issued an interim final rule that amends 12 CFR 7.1001 and 7.1003, which this rulemaking finalizes.

See

85 FR 31943 (May 28, 2020) (Director, Shareholder, and Member Meetings). Further, the OCC has issued a final rule that adds a new § 7.1031, National Banks and Federal Savings Associations as Lenders).

See

85 FR 68742 (October 30, 2020).

See

85 FR 40827 (July 7, 2020) (National Bank and Federal Savings Association Digital Activities).

The OCC also proposed more general changes throughout part 7 including removing outdated or superfluous regulations; consolidating related regulations into one section; and making various technical changes throughout part 7. In addition, the OCC proposed to integrate a number of rules in part 7 to include Federal savings associations.

The OCC notes that pursuant to section 4(b) of the International Banking Act,

many of the provisions in part 7 apply to Federal branches and agencies. This act provides that, subject to certain exceptions, the operations of a foreign bank at a Federal branch or agency shall be conducted with the same rights and privileges as a national bank at the same location and shall be subject to all the same duties, restrictions, penalties, liabilities, conditions, and limitations that would apply under the National Bank Act to a national bank doing business at the same location.

This final rule amends some of the provisions in part 7 to include Federal branches and agencies for ease of reference. However, the lack of inclusion of Federal branches and agencies in a particular provision does not necessarily indicate that the provisions is inapplicable to Federal branches and agencies.

12 U.S.C. 3101

et seq.

(Pub. L. 95-369).

12 U.S.C. 3102(b) (Pub. L. 95-369).

See also

12 CFR 28.13.

The OCC received 16 comment letters on the proposal from banking organizations and other interested parties. These comments and the OCC's response are discussed in the next section of this

Supplementary Information.

As described in more detail below, the OCC is adopting the proposal as a final rule with accompanying modifications where noted. The final rule becomes effective on April 1, 2021.

II. Description of the Proposed Rule

Subpart A—National Banks and Federal Savings Association Powers

Activities That Are Part of, or Incidental to, the Business of Banking (New § 7.1000)

Section 7.5001 identifies the criteria the OCC uses to determine whether an electronic activity is authorized for national banks as part of, or incidental to, the business of banking under 12 U.S.C. 24(Seventh) or other statutory authority. While this section details those criteria in the context of electronic activities, the OCC uses these same criteria to determine whether any activity is part of, or incidental to, the business of banking. To confirm the broader applicability of the criteria listed in § 7.5001, the OCC proposed to remove the word “electronic” from this section and move § 7.5001 to subpart A of part 7 as new § 7.1000. As part of this move, the proposal redesignated current § 7.1000 as § 7.1024. These changes better organize OCC rules and clarify that the criteria of this new § 7.1000 apply to any potential national bank activity and not just those that are electronic in nature. Further, the OCC believes that new § 7.1000 belongs at the beginning of part 7 because it provides the framework for all national bank powers that follow in subpart A.

The OCC also proposed a technical change to redesignated § 7.1000(c)(1). The current rule provides a four factor test to determine whether an activity is part of the business of banking. However, this four-factor test is not necessary for activities that are specifically included in 12 U.S.C. 24(Seventh) or other statutory authority because they are by express statutory language within the business of banking. Therefore, the proposed rule added language to clarify that this four-factor test applies to activities not specifically included in 12 U.S.C. 24(Seventh) or other statutory authority. This clarification reflects the OCC's long-standing use of the four-factor test to determine whether an activity not expressly included in a statute is within the business of banking.

The Supreme Court has held that the business of banking is not limited to the enumerated powers listed in 12 U.S.C. 24(Seventh) but encompasses more broadly activities that are part of or incidental to the business of banking.

NationsBank of N.C., N.A.

Variable Annuity Life Ins. Co.,

513 U.S. 251, 258-60 (1995).

The OCC received one comment that supported new § 7.1000. Therefore, the OCC is adopting § 7.1000 as proposed.

The final rule also corrects a technical error in the proposed rule. Current § 7.5001(d)(3) contains an illustrative list of electronic activities that are incidental to the business of banking. The proposed rule inadvertently removed this list and the final rule restores it as § 7.5001, with conforming changes to the cross-reference to new § 7.1000. The OCC notes that it is reviewing this list in the broader context of potential changes to all of subpart E pursuant to the ANPR on National Bank and Federal Savings Association Digital Activities and may make further changes in the future.

See

85 FR 40827.

National Bank and Federal Savings Association Acting as Finder (§ 7.1002)

The OCC proposed a technical change to its regulation at § 7.1002 relating to when a national bank acts as a finder and invited comment on the inclusion of Federal savings association finder activities in part 7. For the reasons discussed below, the OCC is adopting this technical change and also is amending § 7.1002 to include Federal savings association finder activities.

The OCC has long permitted a national bank to act as a finder to bring together buyers and sellers of financial and nonfinancial products and services.

The OCC's regulations include two separate rules relating to permissible national bank finder activities. Section 7.1002, which codifies OCC interpretive letters, provides that finder activities are part of the business of banking.

This section also describes permissible finder activities; provides an illustrative, non-exclusive list of permissible finder activities; clarifies that a national bank's finder authority does not allow it to engage in brokerage activities that have not been found to be permissible for national banks; and authorizes a national bank to advertise and accept fees for finder services unless otherwise prohibited by Federal law. Section 7.5002 provides that a national bank generally may perform, provide, or deliver through electronic means and facilities any activity, function, product, or service that is otherwise permissible. Section 7.5002(a)(1) clarifies that a national bank may act as an electronic finder and includes a list of permissible electronic finder activities.

See, e.g.,

OCC Interpretive Letter No. 607 (Aug. 24, 1992).

See, e.g.,

OCC Interpretive Letter No. 824 (Feb. 27, 1998).

The OCC proposed amending its regulations by adding a new § 7.1002(b)(8) that would cross-reference the permissible electronic finder activities listed in § 7.5002(a)(1). This change would reference all examples of permissible finder activities for national banks in one rule.

The OCC received one comment letter on § 7.1002. The commenter recommended revising the list of examples to reflect how finder authority is exercised in the modern financial system. The commenter specifically suggested that the OCC consider consolidating the finder authority in §§ 7.1002 and 7.5002. The OCC disagrees with this recommendation. The cross-reference sufficiently clarifies that additional finder activities are listed in that section. Further, the OCC's ANPR on National Bank and Federal Savings Association Digital Activities requested comment on the electronic finder activities list in 12 CFR 7.5002(a)(1).

Through that rulemaking process, the OCC will consider further revisions related to electronic finder activities. A cross-reference will capture these possible revisions without again having to revise § 7.1002. The OCC also may consider consolidating the finder authority in §§ 7.1002 and 7.5002 during the subpart E revision process.

See 85 FR 40827, at 40830.

The commenter further suggested that the final rule add to the list in § 7.1002(b) the making or receiving of a referral to or from a third party for a fee, and more generally suggested that the rule permit banks to accept reasonable finder fees. The OCC notes that § 7.1002 contemplates making referrals for a fee, and the list of examples in § 7.1002 includes “[a]rranging for third-party providers to offer reduced rates to those customers referred by the bank.”

The OCC also believes that continuing to limit fees to those permitted by Federal law is appropriate. Therefore, the final rule does not add a reasonableness requirement. However, the OCC notes that the reasonableness of fees received may raise other concerns and that § 7.4002(b) provides considerations for national banks in setting non-interest charges and fees.

12 CFR 7.1002(b)(3).

The commenter's recommendation to add receiving a referral for a fee also involves adding a bank receiving and paying for finder services from a third party. Longstanding OCC interpretations confirm that banks may pay for finder services, subject to fact-specific considerations.

However, § 7.1002 covers banks acting as finders, and the proposal did not address the authority

of banks to be finder clients. Accordingly, the OCC does not believe that the final rule should add provisions on banks receiving and paying for finder services.

See, e.g.,

OCC Interpretive Letter No. 504 (May 18, 1990) (describing how “finder's fees [paid by a bank] must be high enough to be attractive to potential sources of referrals, yet not so high as to be financially detrimental to the Bank or create an appearance of profit sharing, which could lead to the inference of a joint venture or partnership”).

The same commenter recommended the OCC confirm that payment or collection of finder fees as a share of revenue is permitted. Section 7.1002(d) permits finder fees that do not violate Federal law and does not expressly prohibit specific fee arrangements. The OCC has permitted collection and payment of finder fees as a share of revenue in certain contexts.

However, revenue sharing arrangements may raise supervisory and legal concerns, including whether they result in a joint venture and unlimited liability, which national banks do not have the power to assume.

Rather than codify the permissibility of any specific fee arrangement, the OCC believes that continuing to permit banks to accept fees except as otherwise prohibited by Federal law is appropriate. As described above, the final rule does not add provisions on banks paying finder services, whether those fees are based on revenue or not.

See, e.g., id.;

OCC Interpretive Letter No. 824.

See, e.g.,

OCC Interpretive Letter No. 504 (“National banks are not permitted to be members of general partnerships or, by extension, joint ventures.”);

Merchants' Nat. Bank of Cincinnati

Wehrmann,

202 U.S. 295, 301 (1906) (describing the assumption of unlimited personal liability as “precisely what a national bank has no authority to do”); OCC Interpretive Letter No. 1022 (Feb. 15, 2005).

The commenter further recommended that the final rule codify prior OCC interpretations finding that the sharing of revenue or profit alone in a referral relationship would not constitute a joint venture under State law if the parties express an intent not to create a joint venture. The proposal did not address joint ventures, and we are not inclined to address it in this rulemaking.

The commenter also recommended that the OCC confirm that a bank is not required to disclose finder fees paid or collected. The proposal did not address fee disclosure, and the OCC is not inclined to adopt this recommendation. We also note that OCC precedent requires disclosure of finder fees in certain contexts and inadequate disclosure may raise supervisory and legal concerns.

See, e.g.,

OCC Interpretive Letter No. 850 (Jan. 27, 1999) (citing OCC precedent on disclosure of finder fees in connection with the marketing of trust services); OCC Corporate Decision No. 2002-11 (June 28, 2002) (describing potential conflicts of interest from receiving finder fees and the OCC's expectation that the bank's “interest in promoting specific” products and services be disclosed).

While finder activities are part of the business of banking for a national bank, a Federal savings association may engage in finder activities only to the extent that the activities are incidental to Federal savings association powers authorized under the Home Owners' Loan Act (HOLA) (12 U.S.C. 1461

et seq

The former OTS determined that, if certain factors are met, a Federal savings association may collect fees for referring customers to third parties

and may provide services and products to customers indirectly through a third-party discount program

as activities incidental to their statutorily enumerated powers. The OCC also has recognized Federal savings association finder authority in its Retail Nondeposit Investment Products Booklet of the Comptroller's Handbook.

The OCC and the predecessor agencies previously responsible for the supervision of Federal savings associations “have long recognized that federal savings associations possess `incidental' powers,

i.e.,

powers that are incident to the express powers of federal savings associations as set forth in the Home Owners' Loan Act.” OTS Op. Acting Ch. Couns. at 3 (Mar. 25, 1994).

OTS Op. Ch. Couns. (May 5, 2000).

OTS Op. Ch. Couns. (Aug. 5, 2008).

OCC, Comptroller's Handbook: Retail Nondeposit Investment Products Booklet at 9 (Jan. 2015).

As noted above, the OCC did not propose amendments to § 7.1002 related to Federal savings associations but invited comment on whether it should add a separate provision to § 7.1002 to set forth Federal savings association finder authority. In the preamble to the proposed rule, the OCC offered options to integrate Federal savings associations into § 7.1002. It described a provision for a Federal savings association to engage in finder activities to the extent that those activities are incidental to Federal savings association powers expressly authorized under the HOLA. The OCC also suggested a list of Federal savings association finder activities that the former OTS or the OCC have determined are permissible, such as collecting fees for referring customers to third parties and providing services and products indirectly to customers through a third-party discount program. The OCC specifically requested comment on what other Federal savings association finder activities the OCC could add to this list.

No commenters directly responded to the request for input on Federal savings association finder activities. However, one commenter recommended that the rule include new examples of how national banks and Federal savings associations have exercised finder authority. Because the current rule is limited to national banks, the OCC interprets this comment as a recommendation to incorporate Federal savings associations in § 7.1002.

The OCC agrees that the authority of Federal savings associations to act as finders should be codified in the OCC's regulations. Therefore, the final rule clarifies that Federal savings associations may act as finders to the extent those activities are incidental to their expressly authorized powers under HOLA. In determining whether an activity is incidental, the OCC considers whether (1) the activity facilitates or is similar to the conduct of an activity that Congress expressly authorized, (2) the activity relates to Federal savings associations' intended role as financial intermediaries, (3) the activity is necessary to enable the Federal savings association to remain competitive and relevant in the modern economy, and (4) the activity is consistent with the purpose and function Congress envisioned for Federal savings associations.

Each factor need not support the permissibility of an activity, and the relative weights of each factor may vary.

See

OTS Op. Ch. Couns. (May 5, 2000). All precedents (orders, resolutions, determinations, agreements, regulations, interpretive rules, interpretations, guidelines, procedures, and other advisory materials) made, prescribed, or allowed to become effective by the former OTS or its Director that apply to Federal savings associations remain effective until the OCC modifies, terminates, sets aside, or supersedes those precedents. 12 U.S.C. 5414(b).

See

OTS Op. Ch. Couns. (May 5, 2000).

The source of finder authority for Federal savings associations is more limited and fact-specific than for national banks. The former OTS' approval of referral fees dealt with referrals to registered investment advisors and considered how those services related to a Federal savings association's expressly authorized powers.

Similarly, the former OTS's approval of the third-party discount program considered how the product offerings would facilitate expressly authorized activities of Federal savings associations.

The final rule includes both referrals and third-party discount programs as illustrative examples of the types of finder services that a Federal savings association may provide. However, certain referral and discount programs may not be within the incidental powers of Federal savings associations. Therefore, the final rule clarifies that the examples are permissible if they are incidental to a Federal savings association's express powers. It also states that the OCC may

determine that other activities are permissible.

See id.

OTS Op. Ch. Couns. (Aug. 5, 2008).

Consistent with the current rule's treatment of national banks, the final rule permits Federal savings associations to advertise the availability of and accept a fee for finder services, unless otherwise prohibited by Federal law, and does not enable a Federal savings association to engage in brokerage activities that have not been found to be permissible for Federal savings associations.

As a result of adding Federal savings associations to § 7.1002, the final rule revises paragraph (a) to include the general description of finder activity currently included in paragraph (b) and the statement of authority for both national bank and Federal savings association finder activity. Paragraph (b)(1) includes the nonexclusive list of permissible finder activities for national banks. Paragraph (b)(2) includes the nonexclusive list of permissible finder activities for Federal savings associations. Paragraphs (c) and (d) remain unchanged except for the addition of Federal savings associations.

Money Lent by a National Bank at Banking Offices or at Facilities Other Than Banking Offices (§ 7.1003)

Twelve U.S.C. 81 provides that a national bank must transact business in the place specified in its organization certificate and in any branches established or maintained in accordance with 12 U.S.C. 36. The OCC interprets 12 U.S.C. 81 to mean that money is deemed to be lent at a bank's main office unless there is a sufficient nexus tying the transaction to another location, in which case that location must be licensed as a branch office.

Twelve U.S.C. 36 and 12 CFR 5.30 define “branch” as a place of business established by the national bank where “deposits are received, or checks paid, or money lent.” Section 7.1003 provides that for purposes of what constitutes a branch within the meaning of 12 U.S.C. 36 and 12 CFR 5.30, “money” is deemed to be “lent” only at the place, if any, where the borrower in-person receives loan proceeds directly from bank funds either (1) from the lending bank or its operating subsidiary or (2) at a facility that is established by the lending bank or its operating subsidiary. Section 7.1003(b) further provides that a borrower may receive loan proceeds directly from bank funds in person at a place that is not the bank's main office and is not licensed as a branch without violating 12 U.S.C. 36, 12 U.S.C. 81, and 12 CFR 5.30, provided that a third party is used to deliver the funds and the place is not established by the lending bank or its operating subsidiary. This paragraph defines a third party to include a person who satisfies the requirements of § 7.1012(c)(2) or one who customarily delivers loan proceeds directly from bank funds under accepted industry practice, such as an attorney or escrow agent at a real estate closing.

The OCC proposed amending § 7.1003 to incorporate an OCC interpretation that further clarifies when the OCC considers money to be lent at a location other than the main office. Specifically, proposed paragraph (c) provided that a national bank operating subsidiary may distribute loan proceeds from its own funds or bank funds directly to the borrower in person at offices the operating subsidiary established without violating 12 U.S.C. 36, 12 U.S.C. 81, and 12 CFR 5.30 if the operating subsidiary provides similar services on substantially similar terms and conditions to customers of unaffiliated entities, including unaffiliated banks.

Based on Supreme Court precedent,

OCC interpretations have recognized that a facility must provide a convenience to bank customers that gives the bank a competitive advantage in obtaining customers for the facility to be considered a branch for purposes of 12 U.S.C. 36 and 12 CFR 5.30.

The OCC has found that a facility where members of the public, customers, and noncustomers alike receive substantially similar services on substantially similar terms is not a facility created to attract bank customers and thus the establishment of this type of facility offers no competitive advantage to the national bank.

Proposed paragraph (c) reflects this OCC precedent.

See

Interpretive Letter No. 814 (Nov. 3, 1997).

First National Bank in Plant City

Dickinson,

the Supreme Court explained that because the purpose of 12 U.S.C. 36 is to maintain competitive equality, it is relevant in construing the term “branch” to consider whether the facility gives the bank an advantage in its competition for customers.

First National Bank in Plant City

Dickinson,

396 U.S. 122, 136-137 (1969).

See

OCC Interpretive Letter No. 635 (July 23, 1993).

See also

61 FR 60342, at 60347 (Nov. 27, 1996).

See

OCC Interpretive Letter No. 814 (Nov. 3, 1997).

The OCC received two comments on this proposed change. One commenter stated that if the distribution of loan proceeds by national bank operating subsidiaries does not constitute lending money then, consistent with OCC precedent, the rule should also require that the operating subsidiary actively solicit and service noncustomers and that providing services to noncustomers comprise the predominate share of the subsidiary's business. Otherwise, the commenter stated, the proposed rule will result in competitive inequality and thus be detrimental to the dual banking system. The OCC disagrees with this commenter and does not believe it needs to alter proposed paragraph (c) to be consistent with OCC precedent. The provision in the proposed regulation that the operating subsidiary “provides similar services on substantially similar terms and conditions to customers of unaffiliated entities including unaffiliated banks” should be understood to include the requirement that the bank act substantially similarly in soliciting business from customers and noncustomers. Therefore, the proposed change adequately reflects OCC precedent.

The second commenter supported the proposed changes but suggested that § 7.1003 be broadened to apply equally to facilities of either the national bank or its operating subsidiary. The OCC believes that even if a facility of the national bank itself attempted to provide services to both customers and noncustomers on substantially similar terms and conditions, the public would still perceive it as favoring bank customers and would associate it with the bank, thus giving it a competitive advantage in attracting bank customers. Thus, the OCC declines to extend this provision to include national bank facilities.

For the reasons discussed above, the OCC is adopting § 7.1003 as proposed, with a clarifying change to the section heading, clarifying changes throughout to reference “national banks” instead of “banks,” and the removal of an unnecessary comma in paragraph (c).

Establishment of a Loan Production Office by a National Bank (§ 7.1004)

Credit Decisions at Other Than Banking Offices of a National Bank (§ 7.1005)

Section 7.1004 provides that a national bank may use the services of persons not employed by the bank for originating loans. It also provides that an employee or agent of a national bank or its subsidiary may originate a loan at a site other than the main office or a branch office of the bank without violating the branching and place of business requirements of 12 U.S.C. 36 and 12 U.S.C. 81 if the loan is approved and made at the main office or a branch office of the bank or at an office of an operating subsidiary located on the premises of, or contiguous to, the main office or branch office of the bank. Section 7.1005 provides that a national bank and its operating subsidiary may make a credit decision regarding a loan

application at a site other than the main office or a branch office of the bank provided that “money” is not “lent” at those other sites within the meaning of § 7.1003.

Section 7.1004 is not intended to prescribe where a bank must perform certain activities but rather to help avoid violations of the branching laws by defining a “safe harbor” for loan origination activities that will not constitute branching.

Section 7.1005, in turn, which addresses credit decisions made at a site other than offices of the bank, is based on OCC precedent finding that it is permissible for loans originated at an LPO to be approved at separate back office facilities not located on the premises of, or contiguous to, a main or branch office of the bank.

When the OCC adopted § 7.1005, it noted that it was retaining § 7.1004 despite the potential tension between the two sections because § 7.1004 is a judicially recognized safe harbor and that it did not view a lending related activity that falls outside the scope of § 7.1004, as with § 7.1005, as necessarily violating branching statutes.

OCC Interpretive Letter No. 634 (July 23, 1993).

OCC Interpretive Letter No. 667 (Oct. 12, 1994).

61 FR 4849, at 4851 (Feb. 9, 1996).

The OCC proposed amending § 7.1004 to describe the permitted activities as “loan production activities,” and to remove § 7.1005 to simplify and streamline its rules. As proposed, paragraph (a) of § 7.1004 provided that a national bank or its operating subsidiary may engage in loan production activities at a site other than the main office or a branch office of the bank. Proposed paragraph (a) permitted a national bank or its operating subsidiary to solicit loan customers, market loan products, assist persons in completing application forms and related documents to obtain a loan, originate and approve loans, make credit decisions regarding a loan application, and offer other lending-related services such as loan information and applications at a loan production office without violating 12 U.S.C. 36 and 12 U.S.C. 81, provided that “money” is not deemed to be “lent” at that site within the meaning of § 7.1003 and the site does not accept deposits or pay withdrawals. This description of activities is not intended to alter the description of “money lent” in § 7.1003 nor affect the scope of activities that are permissible for a national bank to perform at a non-branch location. Rather, the OCC proposed this description to clarify the activities a national bank may conduct at a loan production office. The OCC proposed to redesignate former paragraph (a) as paragraph (b) and amend it to reference loan production activities instead of originating loans.

One commenter opposed combining §§ 7.1004 and 7.1005, stating this would allow national bank LPOs to conduct both loan origination and loan approval at an office accessible to the public without causing that LPO to be a branch because under the rule it would not be engaged in lending money. This commenter contends that OCC interpretive rulings and regulations have consistently maintained that money is lent at an office that conducts both loan origination and loan approval because the combination or aggregation of these activities constitutes the substantial equivalent of lending money for purposes of the definition of branch (“aggregation theory”). The commenter therefore claims that although the OCC stated that proposed § 7.1004 was not intended to “affect the scope of activities that are permissible for a national bank to perform at a non-branch location,” this revision does expand the scope of permissible LPO activities and thereby narrows the scope of activities subject to branching restrictions.

The OCC disagrees with this commenter. The proposed revisions to §§ 7.1004 and 7.1005 are consistent with the OCC's precedent and practice for the last two decades.

The OCC abandoned in the 1990s the aggregation theory relied upon by the commenter.

Current § 7.1004 is a safe harbor based on specific judicial precedent.

The proposed revisions remove the § 7.1004 safe harbor because it is redundant with the broader permissibility standard in § 7.1005.

OCC Interpretive Letter No. 667 (Oct. 12, 1994); OCC Interpretive Letter No. 902 (Nov. 16 2000); 61 FR 4849, at 4851 (Feb. 9, 1996); 60 FR 11924, at 11926 (March 3, 1995).

See Indep. Bankers Ass'n of America

Heimann,

627 F.2d 486, 487 (D.C. Cir. 1980), as discussed in 61 FR 4849, at 4851 (Feb. 9, 1996).

Because proposed § 7.1004 is consistent with the OCC precedent discussed, no changes are needed in response to this comment.

This commenter also stated that the proposed “non-branch” rules conflict with the limits on National Bank Act preemption prescribed by Congress that provide that National Bank Act preemption does not apply to agents, affiliates or subsidiaries of national banks. The OCC disagrees with this comment. The Dodd-Frank Act's limits on preemption for agents, affiliates, or subsidiaries of national banks are not implicated by this rulemaking. The proposal incorporated OCC interpretations of what constitutes a branch and a non-branch office and does not raise new preemption issues.

Lastly, this commenter stated that the proposed rule enables banks to avoid Community Reinvestment Act (CRA) obligations associated with licensed branches by expanding what can occur at non-branch national bank offices. However, the new CRA regulation provides that “[a] bank must delineate an assessment area encompassing each location where the bank maintains a main office, a branch, or a non-branch deposit-taking facility that is not an ATM . . . .”

Thus, national banks cannot use non-branch locations to avoid complying with the CRA.

12 CFR 25.09; 85 FR 34734, at 34798 (June 5, 2020).

For the reasons discussed above, the OCC adopts § 7.1004 as proposed.

Loan Agreement Providing for a National Bank Share in Profits, Income, or Earnings or for Stock Warrants (§ 7.1006)

Section 7.1006 permits a national bank to take as consideration for a loan: (1) A share in the profit, income, or earnings from a business enterprise of a borrower or (2) a stock warrant issued by the business enterprise of a borrower provided the bank does not exercise the warrant. This arrangement is known as an “equity kicker.” Section 7.1006 further provides that the national bank may take the share or stock warrant in addition to, or in lieu of, interest. However, the national bank may not condition the borrower's ability to repay principal on the value of the profit, income, earnings of the business enterprise or upon the value of the warrant received.

The former OTS and its predecessor, the Federal Home Loan Bank Board, permitted a Federal savings association to take a share of profit, income, or earnings as consideration for a loan. OTS found this to be not inconsistent with Federal savings association lending authority under HOLA

to maintain parity with the commercial lending practices of national banks.

In addition, the former OTS permitted a Federal savings association to acquire warrants as an incidental power of its authority to make secured loans for commercial, corporate, or business purposes under HOLA and applied the

same restrictions on exercising those warrants as applied to national banks.

12 U.S.C. 1464(c)(2).

Unpublished letter from Jordan Luke, Gen. Couns., Federal Home Loan Bank Board (Dec. 19, 1988),

available on Westlaw:

OTS, 1988 WL 1022319.

Id.

The OCC proposed to amend § 7.1006 to include Federal savings associations and to codify these interpretations to clarify this authority and to better provide parity with national banks. The OCC received no comments on the proposed change and adopts it in the final rule as proposed.

National Bank Holding Collateral Stock as Nominee (§ 7.1009)

Section 7.1009 states that a national bank may transfer stock it has received as collateral for a loan into the bank's name as nominee.

The OCC proposed to delete this provision as unnecessary.

See

12 U.S.C. 24(Seventh).

The OCC permits a bank to perfect its security interests in collateral under applicable State laws consistent with the Uniform Commercial Code.

In situations where a bank holds stock as collateral, one method to perfect that interest under State law is to list the bank as nominee on the stock certificate. However, recent versions of the Uniform Commercial Code

provide other potentially less burdensome methods to perfect an interest in securities collateral, for example, by obtaining control over a brokerage account holding the stock. Therefore, the OCC believes that § 7.1009 is not necessary. Removing this provision streamlines the rule while not substantively changing the methods national banks may use to perfect their interests in stock or other securities obtained as collateral for loans, which continue to include being listed as nominee if permitted under State law.

See

OCC, Comptroller's Handbook: Asset-Based Lending at 21-22 (2017).

Primarily Articles 8 and 9, which have been substantively adopted by all U.S. jurisdictions.

See https://www.uniformlaws.org/acts/ucc.

The OCC received one comment on this provision. The commenter argued that removing the provision may cause national banks to believe the OCC is now requiring the use of the least burdensome method for perfecting stock collateral and it is now impermissible to hold collateral stock as nominee. The commenter requested that the OCC retain the provision in the rule.

The OCC disagrees with the commenter's suggestion. Nothing in the former provision or in removing the provision requires a national bank to use the least burdensome method for perfecting its interest in stock collateral or prohibits other methods of perfection. As explained above, the OCC permits a bank to use any legally acceptable method to perfect its security interests in stock collateral under applicable State laws,

including by being listed as nominee. In contrast, specifically identifying only a single method to perfect an interest in stock collateral as in § 7.1009 could lead a bank to believe that being listed as nominee is the only acceptable method for perfection. Therefore, the OCC is removing § 7.1009 as proposed.

See

OCC, Comptroller's Handbook: Asset-Based Lending at 21-22 (2017).

Postal Services by National Banks and Federal Savings Associations (§ 7.1010)

Section 7.1010 provides that a national bank may operate and receive income from a postal substation on banking premises. It describes permissible services and states that a national bank may advertise to attract customers to the bank. It also requires the bank to operate the substation in accordance with the rules and regulations of the United States Postal Service (USPS) and to keep books and records on the substation, which are subject to inspection by the USPS, separate from those of other banking operations.

The OCC proposed to amend § 7.1010 to also apply to Federal savings associations. This would be consistent with the position taken in agency guidance.

The OCC also proposed to replace the phrase “operate a postal substation” with “provide postal services” because the term “postal substation” is no longer used in USPS regulations. This change in terminology clarifies that national banks and Federal savings associations may offer a limited menu of postal services and are not required to operate full-service post offices.

The former OTS previously concluded that Federal savings associations are authorized to operate a postal substation on premises.

See

OTS Op. Acting Ch. Couns. (Mar. 25, 1994).

The OCC received no comments on these proposed amendments and adopts § 7.1010 as proposed.

National Bank and Federal Savings Association Investments in Small Business Investment Companies (§ 7.1015)

Fifteen U.S.C. 682(b)(1) permits a national bank to invest in one or more small business investment companies (SBICs) or in any entity established solely to invest in SBICs, provided that the total amount of all SBIC investments does not exceed five percent of the bank's capital and surplus.

Section 7.1015 provides that a national bank may purchase stock of a SBIC and receive benefits of the stock ownership. This section further provides that the receipt and retention of a dividend from a SBIC in the form of stock of a corporate borrower of the SBIC is not a purchase of stock within the meaning of 12 U.S.C. 24(Seventh).

National banks also may invest in SBICs pursuant to their community development investment authority

See

12 U.S.C. 24(Eleventh); 12 CFR part 24.

The OCC proposed to amend § 7.1015 to provide that a national bank may invest in a SBIC or in any entity established solely to invest in SBICs, and that purchasing stock in a SBIC is one example of this type of investment. This amendment more closely aligns § 7.1015 to 15 U.S.C. 682(b). In addition, the OCC proposed to amend § 7.1015 to provide that a national bank's SBIC investments are subject to appropriate capital limitations.

Fifteen U.S.C. 682(b)(2) provides a Federal savings association with similar authority to invest in SBICs.

This authority is codified in OCC regulations at 12 CFR 160.30. To clarify this authority, the OCC proposed to add a reference to Federal savings association SBIC authority in § 7.1015 and cross-reference to 12 CFR 160.30.

As with national banks, Federal savings associations also may invest in SBICs pursuant to their community development investment authority.

See

12 U.S.C. 1464(c)(4)(B) and 12 CFR 5.59 (Service corporations of Federal savings associations).

The OCC also proposed to amend § 7.1015 to clarify that a national bank or Federal savings association may invest in a SBIC that is either (1) already organized and has obtained a license from the Small Business Administration or (2) in the process of being organized. The OCC has previously interpreted this authority to permit a national bank to invest in a SBIC that is in the process of being organized.

See

OCC Interpretive Letter No. 832 (June 18, 1998).

The OCC did not receive any comments on the proposed amendments to this section. Therefore, the OCC adopts these changes as proposed.

However, the OCC received one comment requesting that the OCC clarify that a national bank may retain an investment in a SBIC that has surrendered its license to operate as a SBIC during its wind-down period so long as it does not make new investments (other than investments in cash equivalents). The commenter further noted that this change would align with the Volcker Rule implementing regulations, which exclude SBICs from the definition of “covered fund,” and which were recently revised to make clear that this exclusion would continue to apply where a SBIC issuer has voluntarily

surrendered its license to operate as a SBIC in accordance with 13 CFR 107.1900 and does not make new investments (other than investments in cash equivalents) after such voluntary surrender. Further, the commenter suggested that introducing similar clarity into part 7 would provide certainty to banks wanting to invest in SBICs and would increase investment in small businesses.

The OCC agrees with the commenter that it would be helpful to clarify that a bank may retain an interest in a SBIC during its wind-down period. This change would align with the Volcker Rule implementing regulations, and it would provide certainty to banks planning to invest in SBICs. Therefore, the OCC is revising its final rule to clarify that a national bank may retain an investment in a SBIC that has surrendered its license to operate as a SBIC during its wind-down period so long as it does not make new investments in a SBIC that is winding down (other than investments in cash equivalents).

Independent Undertakings Issued by a National Bank or Federal Savings Association To Pay Against Documents (§ 7.1016)

Pursuant to 12 CFR 7.1016, a national bank may issue letters of credit and other independent undertakings within the scope of the applicable laws or rules of practice. Section 7.1016(b) provides that a national bank entering into an independent undertaking should not expose itself to undue risk and also outlines certain safety and soundness considerations for these activities. Section 7.1016 also describes specific required or recommended protections for certain undertakings, provides that a national bank should possess operational expertise that is commensurate with the sophistication of its independent undertaking activities, and requires a bank to accurately reflect its undertakings in its records.

Pursuant to § 160.50, a Federal savings association may issue letters of credit and may issue other independent undertakings as are approved by the OCC, subject to the restrictions in § 160.120. Section 160.120 contains provisions that are largely similar to the provisions applicable to national banks in § 7.1016.

However, §§ 160.50 and 160.120 provide that, unless it is a letter of credit, a Federal savings association only may issue independent undertakings that have been approved by the OCC. The OTS explained when it updated its regulation that Federal savings associations were not traditionally involved in international banking transactions, which utilized these independent undertakings, as were national banks.

The OTS stated that the approval requirement provided “the appropriate balance between giving thrifts greater flexibility to potentially engage in new types of transactions while at the same time ensuring that thrifts have properly evaluated the risks posed by a particular transaction consistent with prudent banking practice.”

See

61 FR 50951, at 50958 (Sept. 30, 1996).

Id.

The OCC proposed to apply § 7.1016 to Federal savings associations and to remove §§ 160.50 and 160.120 because of the similarities between the national bank and Federal savings association independent undertaking regulations. The OCC also proposed technical changes to the footnote to § 7.1016 to reflect updates to the laws and rules of practice cited. The OCC did not receive any comments on these amendments and adopts them as proposed.

The OCC also proposed to clarify that Federal branches and agencies of foreign banks may issue letters of credit and other independent undertakings, consistent with the conditions outlined in § 7.1016.

Two commenters requested clarification as to whether the proposed reference to Federal branches and agencies in § 7.1016 implies that other sections in part 7 are not intended to apply to Federal branches and agencies. One commenter recommended that the final rule clarify that nothing in proposed § 7.1016 is meant to imply that other sections of part 7 do not apply equally to Federal branches and agencies as to national banks and Federal savings associations, consistent with the International Banking Act. After considering these comments, the OCC has decided to remove the language regarding Federal branches and agencies. Although the OCC did not intend the clarification that Federal branches and agencies of foreign banks may issue letters of credit and other independent undertakings, consistent with the conditions outlined in § 7.1016, to affect the applicability of the International Banking Act and 12 CFR 28.13 to other sections of part 7, it understands that the inclusion of this language in § 7.1016 regarding Federal branches and agencies and not in other sections in part 7 may introduce confusion. Instead, the OCC expects to add this language to § 7.1016 and other provisions of part 7, as appropriate, in a future rulemaking.

Section 4(b) of the International Banking Act, 12 U.S.C. 3102(b) (Pub. L. 95-369) provides that the operations of a foreign bank at a Federal branch or agency shall be conducted with the same rights and privileges as a national bank at the same location and shall be subject to all the same duties, restrictions, penalties, liabilities, conditions, and limitations that would apply under the National Bank Act to a national bank doing business at the same location.

See also

12 CFR 28.13.

As indicated below, the final rule adds Federal branches and agencies to § 7.3000, National bank and Federal savings association hours. Because of the difference in corporate structure of these entities as compared to national branches and Federal savings associations, it is necessary to have separate language for Federal branches and agencies in this provision.

One commenter recommended that the OCC reinforce that the risk management considerations outlined for letters of credit and independent undertakings in § 7.1016 are not mandatory safety and soundness conditions by removing them from the text of the rule. The OCC disagrees. Section 7.1016(b) provides safety and soundness considerations for banks that issue independent undertakings. Section 7.1016(b)(1) states that, as a matter of safety and soundness, banks that issue independent undertakings should not be exposed to undue risk and should, at a minimum, consider the following before issuing independent undertakings: (1) Whether the terms make clear the independence of the undertaking; (2) whether the amount of the undertaking is limited; (3) whether the undertaking is limited in duration or, if not, whether the bank has an ability to end the undertaking or demand cash collateral from the applicant; and (4) whether the undertaking will be collateralized or include a reimbursement right. Section 7.1016(b) provides additional considerations in special circumstances to protect against credit, operational, and market risk. Section 7.1016(b)(3) states that the national bank or Federal savings association should possess operational expertise that is commensurate with the sophistication of its independent undertaking activities. By using the word “should,” these provisions clearly indicate that the listed safety and soundness considerations are not mandatory. Furthermore, the OCC finds that it is helpful to include these recommended considerations in the rule text so that national banks and Federal savings associations understand what the OCC may consider to be undue risk.

Financial Literacy Programs Not Branches of National Banks (§ 7.1021)

Twelve CFR 7.1021 provides that a national bank may participate in a financial literacy program on the

premises of, or at a facility used by, a school. Section 7.1021 also provides that the school premises or facility will not be considered a branch of the bank if: (1) The bank does not establish and operate the school premises or facility on which the financial literacy program is conducted; and (2) the principal purpose of the program is educational.

Facilities or premises are only considered to be branches of a national bank if they are established and operated by the national bank. The proposal provided that the OCC would consider establishment and operation in this context on a case by case basis, considering the facts and circumstances. However, the proposal stated that the premises or facility would not be a branch of the national bank if the bank met the safe harbor test in 12 CFR 7.1012(c)(2) applicable to messenger services established by third parties. The proposal also stated that the factor discussed in § 7.1012(c)(2)(i) could be met if bank employee participation in the financial literacy program consisted of managing the program or conducting or engaging in financial education activities provided the school or other organization retained control over the program and over the premises or facilities at which the program is held.

Further, the OCC proposed expanding the scope of financial literacy programs beyond schools to encompass other community-based organizations, such as non-profit organizations, that provide financial literacy programs. Finally, the proposal moved the definition of financial literacy program to the beginning of the section to clarify that, while a financial literacy program is a program for which the primary purpose is educational, this is not a factor in determining whether the premises or facility is a branch for purposes of section 36.

One commenter provided recommendations for simplifying the requirements for operating financial literacy programs. This commenter suggested incorporating the relevant standards for operating a financial literacy program within the messenger service safe harbor directly into the rule, without cross-referencing the messenger service rule. This commenter also suggested that § 7.1021 directly state, as a stand-alone provision, that a bank employee may manage the financial literacy program or engage in other financial education activities, provided the organization retains control over the program and premises at which the program is held. Along the same lines, this commenter recommended expressly permitting a bank employee to accept checks at a financial literacy program event, subject to certain safeguards to prevent operation of the program as a branch—such as having a school official accept the checks and deposit them in a portable lockbox which the branch employee could then be responsible for bringing to the branch. Further, this commenter recommended removing language from the proposal indicating that the OCC would consider the facts and circumstances on a case-by-case basis in determining whether other financial literacy programs outside of the safe harbor constitute a branch. Additionally, this commenter suggested not referring to the messenger service safe harbor as a “test” in order to avoid the implication of additional compliance and audit requirements for the operation of financial literacy programs.

The OCC disagrees with this commenter's recommendations for the reasons set forth below and thus adopts § 7.1021 as proposed. First, the OCC believes that cross referencing the messenger service regulation at § 7.1012 is the best approach for § 7.1021 because the safe harbor for a messenger service may evolve through regulatory changes, statutory changes, new judicial decisions, or new OCC interpretations. By using a cross reference, the OCC automatically incorporates into the financial literacy regulation all evolutions of the messenger service precedent.

Second, the OCC disagrees with the commenter's suggestion that a bank employee may manage the financial literacy program or engage in other financial education activities without the facility being considered a branch so long as the school or organization retains control over the program and over the premises or facilities at which the program is held. Whether a third party other than a national bank owns or rents the facility involved is only one factor in the safe harbor described in § 7.1012(c)(2) for a messenger service to be clearly “established” by a third-party. The OCC does not believe it is appropriate to disregard all the other factors necessary to qualify for the safe harbor when considering school literacy programs as analysis of other factors in § 7.1012 may be determinative under some circumstances. However, it will continue to evaluate programs that do not fulfill all the factors of the safe harbor on an individual basis.

Third, the OCC disagrees with the commenter's recommendation of setting forth a provision that expressly permits a bank employee to accept checks at a financial literacy program event, subject to certain safeguards to prevent operation of the program as a branch. A person transporting items related to branching functions to the bank would be a messenger service, and messenger services are considered branches unless they are established by a third-party.

If the service is being performed by a bank employee as part of his duties, it is not established by a third party.

See First Nat'l Bank of Plant City

Dickinson,

396 U.S. 122 (1969);

Brown

Clarke,

878 F.2d 627 (2d Cir. 1989).

Fourth, the OCC is retaining the language regarding the agency's commitment on a case-by-case basis to evaluate situations outside of the safe harbor. This language is meant to clarify that premises and facilities in such situations will not automatically be found to be branches. This language is not meant to impose an obligation on banks to always submit a request to the OCC for a determination before implementing a financial literacy program outside of the scope of the safe harbor. Banks may forgo asking for an OCC interpretation if they are comfortable with how their program would fit into the OCC's expectations and precedent.

Finally, the OCC clarifies that, by use of the term “test,” it does not mean to impose any extra audit or other compliance requirements on these programs or to suggest that these programs must be subjected to measurement, ratings, or other performance measures. The OCC has routinely referred to safe harbors as “tests” in interpretive letters, guidance, and regulations without the implication of additional obligations.

For the reasons explained above, the OCC is adopting § 7.1021 as proposed.

National Banks' Authority To Buy and Sell Exchange, Coin, and Bullion (§ 7.1022) Federal Savings Associations, Prohibition on Industrial or Commercial Metal Dealing or Investing (§ 7.1023)

The OCC proposed a technical change to §§ 7.1022 and 7.1023. Section 7.1022 prohibits a national bank from acquiring or selling industrial or commercial metal for purposes of dealing or investing. Section 7.1022 excludes industrial and commercial metals from the national bank authority to “buy and sell exchange, coin, and bullion.” Section 7.1023 similarly prohibits a Federal savings association from dealing or investing in industrial or commercial metal. Both sections require a national bank and a Federal savings association to dispose of any industrial or commercial metal held as a result of dealing or investing in that metal as soon as practicable, but not later than one year from the effective date of the

regulation. The OCC may grant up to four separate one-year extensions if the bank makes a good faith effort to dispose of the metal and the retention of the metal for an additional year is not inconsistent with the safe and sound operation of the bank. The OCC proposed to replace the phrase “one year from the effective date of this regulation” with the actual effective date of that final rule, April 1, 2018 in each section. The OCC received no comments on this technical change and adopts it as proposed.

Tax Equity Finance Transactions by National Banks and Federal Savings Associations (New § 7.1025)

The OCC proposed a new § 7.1025 that codifies the authority of national banks and Federal savings associations to engage in tax equity finance (TEF) transactions under 12 U.S.C. 24(Seventh) and 1464 lending authority, respectively.

As defined in proposed paragraph (b)(1), a TEF transaction is a transaction in which a national bank or Federal savings association provides equity financing to fund a project that generates tax credits and other tax benefits and the use of an equity-based structure allows the transfer of those tax credits and other tax benefits to the bank or savings association. Specifically, the OCC proposed in paragraph (a) of § 7.1025 that a national bank and Federal savings association may engage in a TEF transaction pursuant to 12 U.S.C. 24(Seventh) and 1464, respectively, if the transaction is the functional equivalent of a loan, as provided in proposed paragraph (c), and if the TEF transaction satisfies the applicable conditions of proposed paragraph (d). Paragraphs (c) and (d) are described below in the context of the comments received.

For a discussion of existing precedent on such authority,

see

85 FR 40794 (July 7, 2020).

The OCC received eight comments on this section. One commenter stated that the proposed rule would increase administrative compliance burden and suggested the OCC should not codify a rule that addresses the underwriting process but rather should generally require the institutions it regulates to establish safety and soundness standards consistent with other extensions of credit. The OCC disagrees with this comment. Proposed § 7.1025 distills current precedent and standards. Rather than attempt to prescribe the underwriting process for national banks and Federal savings associations, the proposal required national banks and Federal savings associations to use underwriting and credit approval criteria and standards that are substantially equivalent to the underwriting and credit approval criteria and standards used for traditional loans. This is consistent with the notion that a permissible TEF transaction is the functional equivalent of a loan.

One commenter stated that there is an existing rental affordability crisis and therefore the OCC should not impose burdensome requirements and restrictions on tax equity finance transactions that might reduce low income housing tax credit investment. The OCC believes the clarity and safety and soundness benefits of § 7.1025 outweigh any potential burden. Moreover, § 7.1025 provides an additional authority for national banks and Federal savings associations to make TEF transactions. It does not limit or impede a national bank or Federal savings association from participating in transactions under other existing authorities. Therefore, if a national bank or Federal savings association wishes to engage in a low income housing tax credit investment under existing public welfare investment or community development authority, it could do so as long as it meets the requirements of those existing authorities.

Relatedly, the OCC received eight comments requesting that the OCC confirm that TEF authority is separate and apart from the public welfare investment authority and community development investment authority. As indicated above, the authority granted under § 7.1025 operates in addition to the existing public welfare investment authority and community development investment authority under 12 U.S.C. 24(Eleventh), 12 U.S.C. 1464(c)(3)(A), 12 CFR part 24, 12 CFR 160.30, and 12 CFR 160.36, and will not be a replacement authority. To the extent an investment would qualify under multiple authorities, the national bank or Federal savings association may determine which authority it is using to engage in the transaction. To eliminate any confusion on this point, the final rule adds a sentence to § 7.1025(a) indicating that the authority under § 7.1025 is pursuant to 12 U.S.C. 24(Seventh) and 1464 lending authority and is separate from, and does not limit, other investment authorities available to national banks and Federal savings associations.

One commenter supported the intent of the proposed rule but suggested the OCC needs to familiarize itself with, and contemplate the impact of, certain Internal Revenue Service (IRS) rules and standards relating to TEF transactions and structures, including sections 49 and 50 of the Internal Revenue Code, Revenue Procedure 2007-65 and Revenue Procedure 2014-12, and whether the proposed rule would make renewable energy TEF transactions non-compliant with these laws and IRS Procedures. The OCC is familiar with sections 49 and 50 of the Internal Revenue Code, Revenue Procedures 2007-65 and 2014-12, as well as other IRS rules and guidance on tax credits, and believes the TEF provision would not prevent a national bank or Federal savings association from complying with IRS rules, procedures, and standards. Therefore, OCC is finalizing § 7.1025(a) as proposed.

The OCC proposed to define a “tax equity finance transaction” in § 7.1025(b)(1) as a transaction in which a national bank or Federal savings association provides equity financing to fund a project that generates tax credits and other tax benefits and the use of an equity-based structure allows the transfer of those credits to the bank or savings association. The OCC received two comments on this provision. One commenter suggested that the OCC should review current draft legislation for impacts on the terms “generation” and “renewable” if energy storage is added to section 48 of the Internal Revenue Code. Proposed § 7.1025(b)(1) defines a tax equity finance transaction in part to mean a transaction that generates tax credits and other benefits. In response, the OCC notes that, because the definition does not limit tax equity finance transactions to only those that relate to energy generation, if section 48 were amended to add energy storage, national banks and Federal savings associations would be able to engage in transactions involving energy storage that met the requirements of § 7.1025.

Another commenter noted that a TEF structure may involve other tax benefits in addition to tax credits, such as deductions and other items that fall under the category of tax equity. The OCC acknowledges that tax benefits may take many forms and is revising proposed § 7.1025(b)(1), redesignated as § 7.1025(b)(3) in the final rule, to change “generates tax credits and other tax benefits” to “generates tax credits or other tax benefits.”

The OCC also requested comment on whether national banks and Federal savings associations are currently participating in TEF transactions through fund-based structures and, if not, whether national banks and Federal savings associations would want to participate in TEF transactions through fund-based structures. A fund-based structure is a structure in which a national bank or Federal savings

association invests in a fund that is invested or will invest in multiple TEF transactions. Seven commenters responded to this question and suggested that the final rule should allow TEF investments through investment funds or other funds-based structures. For the reasons discussed by commenters, including diversifying risk, enabling smaller investments, and permitting less experienced national banks and Federal savings associations to participate alongside more experienced TEF investors, the OCC will permit TEF investments through investment funds as long as the investment meets all of the requirements and conditions of § 7.1025. The OCC is revising proposed § 7.1025(b)(1), redesignated as § 7.1025(b)(3) in the final rule, to change “. . . to fund a project that generates tax credits . . .” to “. . . to fund a project or projects that generate tax credits . . . .”

The OCC is adopting the proposed definition of “tax equity finance transaction” with these two changes discussed above.

The proposed rule included an aggregate total dollar limitation on TEF transactions that a national bank or Federal savings association could engage in based on a percentage of a national bank or Federal savings association's capital and surplus. The OCC proposed to define “capital and surplus” in § 7.1025(b)(2) by cross-referencing to its definition in the OCC's lending limit rule at 12 CFR part 32.

As defined in the lending limit rule, for qualifying community banking organizations that have elected to use the community bank leverage ratio framework as set forth under the OCC's Capital Adequacy Standards at 12 CFR part 3, “capital and surplus” means a qualifying community banking organization's tier 1 capital, as used under 12 CFR 3.12, plus a qualifying community banking organization's allowance for loan and lease losses or adjusted allowances for credit losses, as applicable, as reported in the Consolidated Reports of Condition and Income (Call Report). For all other national banks and Federal savings associations, “capital and surplus” means a national bank's or savings association's tier 1 and tier 2 capital, calculated under the risk-based capital standards applicable to the institution as reported in the Call Report, plus the balance of a national bank's or Federal savings association's allowance for loan and lease losses or adjusted allowances for credit losses, as applicable, not included in the bank's or savings association's tier 2 capital, for purposes of the calculation of risk-based capital, as reported in the national bank's or savings association's Call Report. The OCC received no comments on proposed § 7.1025(b)(2) and is finalizing it as proposed.

The OCC recently amended the definition of “capital and surplus” in 12 CFR 32.2 in its recent community bank leverage ratio rule.

See

84 FR 61776 (November 13, 2019).

Under proposed § 7.1025(c), a TEF transaction would qualify as the functional equivalent of a loan if it meets seven requirements that derive from OCC interpretations. First, paragraph (c)(1) provides that the TEF transaction structure must be necessary for making the tax credits and other tax benefits available to the national bank or Federal savings association. One commenter suggested that the OCC should clarify that the tax equity finance transaction structure may be necessary for making the tax credits or other tax benefits available. The OCC acknowledges that tax benefits may take many forms and is revising proposed § 7.1025(c)(1) to change “making the tax credits and other tax benefits available” to “making the tax credits or other tax benefits available.” With this revision, the OCC is finalizing § 7.1025(c)(1).

Second, paragraph (c)(2) provides that the TEF transaction must be of limited tenure and not indefinite. Under this requirement, a national bank or Federal savings association would need to be able to achieve its targeted return in a reasonable time, and the TEF transaction would need to have a defined termination point. A national bank or Federal savings association could satisfy this requirement if the TEF transaction will terminate within a reasonable time of the transaction's initiation or if a project sponsor has an option to purchase a national bank's or Federal savings association's interest at or near fair market value. The national bank or Federal savings association cannot control whether it retains the interest indefinitely. The proposed rule permitted a national bank or Federal savings association to retain a limited investment interest if that interest is required by law to obtain continuing tax benefits from the TEF transaction. The OCC received five comments on this requirement.

Three commenters requested clarification that the 15-year holding period for LIHTC investments would not violate the limited tenure requirement. The OCC confirms that under § 7.1025(c)(2), a national bank or Federal savings association may hold an investment in order to obtain and retain tax benefits as required by law, including holding the investment to comply with the 15-year recapture period for LIHTC investments.

Three commenters suggested that a requirement that the sponsor have a call option would have adverse tax consequences in certain TEF transactions and suggested removing that requirement. However, proposed § 7.1025(c)(2) does not require that a sponsor must have a call option in order to comply with § 7.1025; it requires only that the transaction is of limited tenure and is not indefinite, such as a limited investment interest requirement by law to obtain continuing tax benefits. The OCC used a call option as an example in the preamble to the proposed rule as one way a national bank or Federal savings association could comply with the limited tenure requirement. The OCC did not intend this to be an exhaustive list.

One commenter suggested the OCC clarify in the final rule that TEF investments may be retained for the duration needed to obtain the expected rate of return consistent with market practices for such an investment. The OCC agrees with the commenter and is revising § 7.1025(c)(2) to require that the transaction is of limited time and is not indefinite, including retaining a limited investment interest that is (1) required by law to obtain continuing tax benefits or (2) needed to obtain the expected rate of return.

One commenter suggested proposed § 7.1025 could result in the sale of an investment at a price lower than the bank could otherwise obtain. Although a national bank or Federal savings association may exit a TEF transaction through a sale to a third party, the OCC does not expect that sale to be immediate if it would result in fire sale pricing. One commenter suggested the OCC should clarify that it is permissible to have a purchase option price that includes an amount necessary for a national bank or Federal savings association to achieve its expected rate of return. The OCC notes that an option to purchase may include an amount necessary for a national bank or Federal savings association to achieve its expected rate of return, and the OCC believes this would be consistent with the requirements and conditions of § 7.1025.

One commenter requested the OCC explicitly permit other structures that are required by law to obtain tax benefits. This commenter cited to Internal Revenue Service Revenue Procedure 2014-12, which the commenter stated provides a safe harbor for an exit structure in which the investor “puts” its interest back to the

project instead of the sponsor having an option to purchase the interest at or near fair market value. The OCC agrees with the commenter that transaction structures that provide different exit options may satisfy § 7.1025(c) as long as the national bank or Federal savings association does not control whether it retains the interest indefinitely. However, the safe harbor provided in IRS Revenue Procedure 2014-12, in which the national bank or Federal savings association would have a put option that it could have the sponsor purchase the interest at or near market value, would not satisfy, by itself, the requirements of § 7.1025(c)(2) because a put option alone would allow the national bank or Federal savings association to decide whether it would hold the investment indefinitely (

i.e.,

let the put expire). The national bank or Federal savings association could couple the put option with another exit mechanism in which both the IRS safe harbor and the requirements of the TEF provision are met, such as a put option coupled with a contract provision providing that after a certain amount of time has passed or a certain rate of return has been reached, the interest will revert from the national bank or Federal savings association to the sponsor. With the change described above, the OCC is finalizing § 7.1025(c)(2).

Third, paragraph (c)(3) provides that the tax benefits and other payments received by the national bank or Federal savings association from the TEF transaction must repay the investment and provide an implied rate of return. As a result of this proposed requirement, the national bank's or Federal savings association's underwriting could not place undue reliance on the value of any residual stake in the project and the proceeds of disposition following the expiration of the tax credits' compliance period. The OCC received two comments on proposed § 7.1025(c)(3). One commenter suggested that the OCC should clarify in the final rule that the calculation of the rate of return is the expected rate of return at the time the investment is initially made and revise § 7.1025(c)(3) to refer to the expected rate of return at original underwriting. The OCC agrees with the commenter and is revising § 7.1025(c)(3) to refer to the expected rate of return at the time of underwriting.

One commenter suggested that the OCC consider

Sacks

Commissioner, Internal Revenue Service

and its use of “implied rate of return” so that the final rule does not render moot the decision in this case that recognized the congressional purposes underlying Federal tax credits and held that a pretax profit was not required for economic substance purposes. The OCC does not believe that § 7.1025(c)(3) renders this case moot. Consistent with

Sacks,

§ 7.1025(c)(3) does not require a pretax profit, rather, it simply requires an expected rate of return that contemplates the tax credit and other benefits.

Sacks

Commissioner, Internal Review Service,

69 F.3d 982, 991 (9th Cir. 1995).

See

69 F.3d at 991.

One commenter suggested that in matters concerning any residual stake in the project, the IRS true lease authority must be understood, and the OCC should not force or cause a renewable energy project sponsor to violate IRS requirements. Proposed § 7.1025(c)(3) does not contain residual stake language. Rather, as the preamble to the proposed rule explained, a national bank's or Federal savings association's underwriting should not place undue reliance on the value of any residual stake in the project. The OCC does not believe that this language in any way would cause or force a project sponsor to violate IRS requirements. With the revision discussed above, the OCC is finalizing § 7.1025(c)(3).

Fourth, paragraph (c)(4) provides that the national bank or Federal savings association must not rely on appreciation of value in the project or property rights underlying the project for repayment. As discussed in OCC Interpretive Letter No. 1139 (November 13, 2013), wind turbines, solar panels, and other ancillary equipment are not considered real property under 12 U.S.C. 29, and acquisition of interests in real estate incidental to the provision of financing is not inconsistent with 12 U.S.C. 29. The OCC received no comments on this requirement and is finalizing § 7.1025(c)(4) as proposed.

Fifth, paragraph (c)(5) provides that the national bank or Federal savings association must use underwriting and credit approval criteria and standards that are substantially equivalent to the underwriting and credit approval criteria and standards used for a traditional commercial loan. To comply with this requirement, the documents governing the TEF transaction should contain terms and conditions equivalent to those found in documents governing typical lending relationships and transactions. The OCC received no comments on this requirement and is finalizing § 7.1025(c)(5) as proposed.

Sixth, paragraph (c)(6) provides that the national bank or Federal savings association must be a passive investor in the transaction and must not be able to direct the affairs of the project company. This means that the national bank or Federal savings association is not able to direct day-to-day operations of the project. However, the OCC does not consider temporary management activities in the context of foreclosure or similar proceedings as violating this requirement. One commenter suggested that the OCC should clarify in the final rule that customary protective rights and covenants are permitted and do not violate the “passive investor” requirement of § 7.1025(c)(6). The OCC agrees that customary protective rights and covenants are permitted and do not violate § 7.1025(c)(6). However, the OCC does not believe changing the proposed rule text is necessary. TEF transactions are the functional equivalent of loans and many of the same terms, conditions, and covenants found in lending and lease financing transactions are permissible for TEF transactions. In some cases, these terms, conditions, and covenants may be necessary to comply with the requirement in § 7.1025(c)(5) that underwriting and credit approval criteria and standards must be substantially the same as those used for traditional commercial loans. The OCC is finalizing § 7.1025(c)(6) as proposed.

Seventh, paragraph (c)(7) provides that the national bank or Federal savings association must appropriately account for the transaction initially and on an ongoing basis and document contemporaneously its accounting assessment and conclusion. Although TEF transactions can be the functional equivalent of loans pursuant to a national bank's or Federal savings association's lending authority, the accounting treatment of tax equity investments may differ from the treatment of a loan. Two commenters noted that investments in housing credit transactions are structured as equity investments and requested that those investments be treated as equity investments and not loans for Federal income purposes. The OCC acknowledges that although a transaction may be the functional equivalent of a loan for permissibility purposes, it may be treated as an equity investment for accounting or tax purposes. Section 7.1025(c) provides that a national bank or Federal savings association must appropriately account for the transaction initially and on an ongoing basis and document its accounting assessment and conclusion. The OCC is finalizing § 7.1025(c)(7) as proposed.

Proposed paragraph (d) provides that a national bank or Federal savings

association only may engage in TEF transactions if it meets the following four additional requirements. First, proposed paragraph (d)(1) provides that the national bank or Federal savings association cannot control the sale of energy, if any, from the project. To satisfy this requirement, a national bank or Federal savings association could enter into a long-term contract with creditworthy counterparties to sell energy from the project, as articulated in OCC Interpretive Letter 1139, or have the project sponsor bear responsibility for selling generated power into the energy market so long as those sales are stabilized by a hedge contract that provides reasonable price and cash flow certainty, as articulated in OCC Interpretive Letter No. 1141 (April 22, 2014). One commenter suggested that the final rule should clarify that national banks and Federal savings associations have appropriate flexibility in satisfying this requirement and that the OCC should not require a long-term contract or hedge if the national bank or Federal savings association has otherwise determined that exposure to cash flow certainty has been adequately mitigated. The OCC confirms that national banks and Federal savings associations have flexibility to satisfy this requirement. Proposed § 7.1025(d)(1) requires that national banks and Federal savings associations cannot control the sale of energy from a project, but the provision does not prescribe that certain agreements or arrangements must be used. Although, the preamble for proposed § 7.1025(d)(1) lists two examples of ways a national bank or Federal savings association could comply with the requirement, these examples are not the only ways a national bank or Federal savings association could satisfy this requirement.

One commenter suggested the OCC should confirm that contracts for the sale of energy can be entered into with affiliates of the national bank or Federal savings association participating in the TEF transaction, so long as such contracts are consistent with the TEF requirements and do not create negative tax consequences. The OCC confirms that a national bank or Federal savings association may enter into energy sale contracts with affiliates as long as the requirements of § 7.1025 are met and any transaction with an affiliate complies with 12 U.S.C. 371c, 12 U.S.C. 371c-1, 12 CFR part 223, and any other applicable laws and regulations regarding affiliate transactions. Similarly, one commenter requested that the OCC explicitly confirm that the project company's hedging counterparty does not need to be an unaffiliated third party and may be the national bank or Federal savings association itself or an affiliate of the national bank or Federal savings association. The OCC confirms that a project company's hedging counterparty need not be an unaffiliated third party and may be an affiliate of the national bank or Federal savings association so long as the sale meets the requirements of § 7.1025 and any applicable affiliate transactions laws and regulations, including 12 U.S.C. 371c and 371c-1, and 12 CFR part 223, and is conducted in a safe and sound manner (

e.g.,

the counterparty is creditworthy). However, a national bank or Federal savings association itself may not be the hedging counterparty for one of its TEF investments.

One commenter requested the OCC clarify that the right of a national bank or Federal savings association to prohibit certain sales does not constitute inappropriate control of the right to sell power. The OCC confirms a national bank or Federal savings association may prohibit certain sales or institute certain credit or other requirements for third party purchasers of the energy if done pursuant to prudent underwriting to ensure the project's success and not in an attempt to control, influence, or manipulate the energy market. One commenter requested the OCC recognize that a TEF project may sell a portion of the electricity that it generates into the merchant market, and not pursuant to a power purchase agreement or a hedge contract, and permit a national bank or Federal savings association to invest in such projects as long as it has reasonably determined that any merchant sales by the project company contribute favorably to the overall financial health of the project company. The OCC confirms a TEF project may sell energy into a merchant market as long as the national bank or Federal savings association is not controlling the sale of the energy and the TEF transaction otherwise complies with the requirements and conditions of § 7.1025.

One commenter suggested that certain terms, such as “long term,” “creditworthy,” and “sell” make the provision unworkable given market realities. The OCC recognizes that there may be changes in market practice and standards in the evolving space of TEF transactions, and renewable energy transactions in particular. For that reason, § 7.1025(d)(1) does not prescribe how a national bank or Federal savings association must comply with the requirement not to control energy from the sale of the project. Rather, § 7.1025(d)(1) simply requires that a national bank or Federal savings association must not control the sale of energy from the project. In the preamble to the proposed rule, the OCC provided a couple of examples of how a national bank or Federal savings association may satisfy the requirement, but these examples are illustrative only. The terms “creditworthy” and “sell” do not appear in the proposed rule text and instead are used in the proposed rule's preamble to describe examples of how a national bank or Federal savings association may satisfy the requirement in § 7.1025(d)(1). The OCC is finalizing § 7.1025(d)(1) as proposed.

Second, proposed paragraph (d)(2) provides that the national bank or Federal savings association must limit the total dollar amount of TEF transactions to no more than five percent of its capital and surplus unless the OCC determines, by written approval of a written request by the national bank or Federal savings association to exceed the five percent limit, that a higher aggregate limit will not pose an unreasonable risk to the national bank or Federal savings association and that the TEF transactions in the national bank's or Federal savings association's portfolio will not be conducted in an unsafe or unsound manner. In no case may a bank's or Federal savings association's total dollar amount of TEF transactions exceed fifteen percent of its capital and surplus. As provided for public welfare investments under 12 U.S.C. 24(Eleventh) and 12 CFR part 24, a national bank is generally subject to a five percent aggregate investment limit and this limit encourages a national bank to maintain appropriate risk diversification.

The OCC specifically requested comment on whether the OCC should use an alternate measure when calculating the aggregate investment limit and whether the proposed five percent aggregate investment limit is appropriate. One commenter suggested that the final rule should not impose a cap on TEF transactions and instead should continue to be subject to the limits set forth in 12 CFR part 32 and other concentration risk limits, which are appropriate and adequate to any concentration or similar risks presented by TEF transactions. One commenter also suggested that only a small number of national banks and Federal savings associations are able to participate in TEF transactions and that these banks would quickly hit this arbitrary five percent limit. The OCC is retaining the proposed five percent aggregate limit,

which can be increased up to 15 percent with written approval from the OCC. The OCC interpretations that this provision is codifying include a three percent cap on TEF transactions.

The OCC believes that a limit is necessary but that the limit can be safely increased to five percent. Although TEF transactions will be subject to the legal lending limits on loans to one borrower as the commenter correctly pointed out, the OCC believes maintaining the aggregate transaction limitation will allow the OCC to assess how the authority is implemented and any safety and soundness concerns that may arise. The OCC is finalizing § 7.1025(d)(2) as proposed.

12 U.S.C. 24(Eleventh); 12 CFR 24.4(a).

OCC Interpretive Letter 1139 (Nov. 13, 2013); OCC Interpretive Letter 1141 (Apr. 22, 2014).

Third, proposed paragraph (d)(3) provides that the national bank or Federal savings association must have provided written notification to the OCC prior to engaging in each TEF transaction that includes its evaluation of the risks posed by the transaction. The OCC received four comments on this requirement. The commenters suggested that the OCC should not require national banks and Federal savings associations to provide prior written notification and instead should be allowed to provide after-the-fact notification or follow the post-notification procedures available under the public welfare investment authority.

One commenter also suggested that prior notice for each transaction is overly burdensome and of little value to examiners, and, if necessary, the OCC should limit it to when a bank first engages in TEF activity and not require it for each subsequent transaction. The OCC disagrees with these comments. A national bank or Federal savings association may use the appropriate post-investment notification procedures for investments made pursuant to the public welfare investment authority or other applicable existing authorities, but to the extent that a national bank or Federal savings association is using TEF authority under § 7.1025, it must comply with the requirements and conditions contained in the provision, including prior written notification, before engaging in each transaction. Examiner-in-Charge (EIC) non-objection was required under the OCC's existing interpretations for TEF transactions. The OCC is not creating a new requirement but, rather, is modifying the non-objection requirement to a less onerous notice requirement. The OCC may assess over time whether prior notices are necessary for subsequent transactions or whether after-the-fact notices would be sufficient, and may revise § 7.1025 as appropriate at that time. A well-managed national bank or Federal savings association engaging in TEF transactions under § 7.1025 authority must provide prior notice as required by § 7.1025 whether engaging in the activity at the bank or savings association-level or through an operating subsidiary. The OCC is finalizing § 7.1025(d)(3) as proposed, with one clarifying change. The final rule clarifies that the notice is to be provided to the appropriate OCC supervisory office, and adds a definition of this term at § 7.1025(b)(1) to mean the OCC office that is responsible for the supervision of a national bank or Federal savings association, as described in subpart A of 12 CFR part 4.

12 CFR 24.5(a).

This final rule also makes technical changes to part 4, subpart A.

See

the “Technical Changes” section of this

SUPPLEMENTARY INFORMATION

Fourth, proposed paragraph (d)(4) provides that the national bank or Federal savings association must be able to identify, measure, monitor, and control the associated risks of its tax equity finance transaction activities individually and as a whole on an ongoing basis to ensure that it conducts such activities in a safe and sound manner. The OCC received one comment related to this provision regarding the use of the word “control.” The commenter suggested that the final rule should eliminate the word “control” or otherwise acknowledge that it is not meant to suggest that national banks and Federal savings associations should have more than the limited control over TEF transaction activities that is consistent with the passive nature of these investments. The OCC clarifies that use of the word “control” in relation to risk management of TEF activities is consistent with the passive nature of these transactions and a national bank or Federal savings association satisfying this condition would not be in conflict with the passivity requirement of § 7.1025(c)(6). Similar to how a national bank or Federal savings association identifies, measures, monitors, and controls risks related to loans and other extensions of credit but does not exercise control over the business of the borrower, a national bank or Federal savings association would identify, measure, monitor and control risks related to the transaction but would not be exercising control over the operations of the project or projects underlying the TEF transaction. The OCC is finalizing § 7.1025(d)(4) as proposed.

The OCC requested comment on whether national banks or Federal savings associations routinely obtain legal opinions regarding the availability of tax credits in connection with these types of finance transactions. One commenter suggested that a national bank or Federal savings association should not be required to obtain a legal opinion on the tax benefits of a TEF transaction, but rather the OCC should require a good faith, reasoned basis for making that determination. The commenter suggested that it is not market practice to obtain a legal opinion that says a TEF structure is “necessary” in order for the tax benefits to be available. Instead, the commenter suggested the OCC should recognize that national banks and Federal savings associations employ a range of approaches to evaluating the tax benefits of TEF transactions.

The OCC agrees with the commenter that there should be flexibility related to the legal analysis underlying the tax availability determination. However, the OCC believes that the final rule should require the national bank or Federal savings association to have a reasonable basis for determining the availability of tax credits in connection with TEF transactions. Therefore, the OCC is including in the final rule a more flexible provision. Specifically, new § 7.1025(d)(5) requires a national bank or Federal savings association to obtain a legal opinion, or to have other good faith, reasoned bases for making the determination that tax credits or other tax benefits are available before engaging in a TEF transaction. A legal opinion includes either an outside counsel opinion or an opinion provided by a national bank or Federal savings association's internal or in-house counsel. Although a legal opinion is not the only means to fulfill this requirement, a good faith, reasoned basis requires more than simply accepting a statement from a person or entity promoting an investment. A national bank or Federal savings association may not rely solely on the assurances of a person or entity promoting a TEF transaction that tax credits will be available.

Proposed paragraph (e) provides that the TEF transaction must be subject to the substantive legal requirements of a loan, including the lending limits prescribed by 12 U.S.C. 84, as implemented by 12 CFR part 32, and, if the active investor or project sponsor of the transaction is an affiliate of the national bank or Federal savings association, the restrictions on

transactions with affiliates prescribed by 12 U.S.C. 371c and 371c-1, as implemented by 12 CFR part 223. If a national bank or Federal savings association is relying on its lending authority to participate in a TEF transaction, the TEF transaction would be subject to regulatory requirements applicable to loans, including any applicable legal lending limits and affiliate transaction restrictions to the extent applicable. However, the regulatory capital treatment of a national bank or Federal savings association's participation in a TEF transaction would be determined according to the regulatory capital rule (12 CFR part 3). The OCC received no comments on § 7.1025(e) and is finalizing this provision as proposed.

The OCC specifically requested comment on whether the final rule should prohibit a national bank or Federal savings association from entering into TEF transactions for projects involving residential installation TEF transactions not involving utility-scale standalone power-generation facilities. One commenter suggested that the final rule should not prohibit these transactions so as not to arbitrarily reserve it for only one segment of the market. The OCC concurs with this comment and will not limit TEF transactions to only those involving standalone utility-scale power generation facilities in the final rule. A national bank or Federal savings association may participate in a TEF transaction if it meets the requirements and conditions of § 7.1025 and the OCC has not raised safety and soundness concerns related to the particular transaction.

The OCC also requested comment on whether the final rule should permit national banks or Federal savings associations to invest in TEF transactions involving detached single-family residences, multi-family residences, or non-utility commercial buildings. Five commenters suggested that the OCC should permit national banks and Federal savings associations from entering into these transactions, with one commenter suggesting the OCC should affirm longstanding OCC precedent that the legal permissibility of a TEF transaction is agnostic as to end-user segment and underlying asset. The OCC confirms that it will not prohibit a national bank or Federal savings association from entering into TEF projects involving detached single-family residences, multi-family residences, or non-utility-scale commercial buildings. As is the case with loans and leases, the legal permissibility of a TEF transaction is not dependent on the end-user segment and underlying asset. Therefore, the OCC is finalizing § 7.1025 without a prohibition on residential TEF transactions.

One commenter also requested that the OCC confirm there is no prohibition on, and that tax credit availability would not be affected by, national banks funding a portion of their TEF investment during late stage construction if required to qualify for the tax benefits and adequate protections are in place. The OCC confirms that there is no prohibition on national banks or Federal savings associations funding a portion of their TEF investment during late stage construction if required to qualify for the tax benefits and adequate protections are in place. However, the OCC cannot opine on whether late stage investment would affect the availability of the tax credit and such inquiries should be directed to the IRS.

Further, the OCC requested comment on whether national banks and Federal savings associations should have other contractual remedies available before entering into a TEF transaction. Two commenters suggested that the final rule should not prescribe any particular contractual remedies for TEF transactions, including guarantees or indemnities, but rather, should allow national banks and Federal savings associations the flexibility to choose the most appropriate remedies for a given transaction. Another commenter suggested that requiring certain contractual provisions is not necessary, noting that it is common for national banks and Federal savings association to require such remedies as a business practice when making other investments even though the OCC does not require them and that such remedies are best left up to national banks and Federal savings associations. The OCC agrees with these commenters that national banks and Federal savings associations should be afforded the flexibility to choose contractual remedies as appropriate. Therefore, the OCC is finalizing § 7.1025 without requiring specific contractual remedies.

National Bank and Federal Savings Association Payment System Memberships (New § 7.1026)

Section 7.1026 Payment System Memberships.

National banks may join payment systems.

OTS precedent also permits Federal savings associations to join payment systems.

The OCC proposed a new rule that would codify OCC interpretations regarding national bank membership in payment systems and apply this new provision to Federal savings associations. Specifically, proposed § 7.1026 required a national bank or Federal savings association to provide 30-day prior notice to the OCC before joining a payment system if the bank or savings association would be exposed to open-ended liability. The national bank or Federal savings association would need to provide the OCC with a 30-day after-the-fact notice before joining any other payment system where the bank or savings association is not exposed to open-ended liability. These notices must contain representations that the national bank or Federal savings association has identified and evaluated the risks posed by membership in the payment system and will measure, monitor, and control those risks after membership. The proposal permitted a national bank or Federal savings association to consider its liability to a particular payment system to be limited if the bank or savings association obtains an independent legal opinion confirming this limited liability prior to joining the payment system. Finally, the proposal required a national bank or Federal savings association to notify its appropriate OCC supervisory office if its ongoing review identifies a safety and soundness concern as soon as that concern is identified and to take appropriate actions to remediate the risk. Several commenters expressed general support for the proposed approach for joining payment systems and, as explained further below, the OCC is adopting the proposal largely as proposed.

See, e.g.,

OCC Conditional Approval Letter No. 220 (Dec. 2, 1996); OCC Interpretive Letter No. 993 (May 16, 1997); OCC Interpretive Letter No. 1140 (Jan. 13, 2014); OCC Interpretive Letter No. 1157 (Nov. 12, 2017).

See, e.g.,

12 CFR 145.17; OTS Op. Ch. Couns. (Sept. 15, 1995); OTS Op. Ch. Couns. (Dec. 22, 1995).

Definitions.

In proposed § 7.1026(b), the OCC defined several terms used throughout the new section. First, the proposal defined “appropriate OCC supervisory office” as the OCC office that is responsible for the supervision of a national bank or Federal savings association, as described in subpart A of 12 CFR part 4. The OCC received no comments on this definition and is adopting it as proposed.

Second, because different payment systems may use different terminology, the OCC defined “member” to include a national bank or Federal savings association designated as a “member,” a “participant,” or other similar role by a payment system, including by a payment system that requires the

national bank or Federal savings association to share in operational losses or maintain a reserve with the payment system to offset potential liability for operational losses. The OCC received one comment that indirect members of payment systems should not be included in the definition of “member” unless they are bound by the rules of the payment system and such rules, including any open-ended liabilities imposed, purport to extend to such indirect members. The OCC agrees with this commenter that it would be appropriate to include indirect members only in these specific circumstances and, thus, is amending the definition of “member” in the final rule to reflect this comment.

Third, the OCC defined “open-ended liability” as liability for operational losses that is not capped under the rules of the payment system and includes indemnifications provided to third parties as a condition of membership in the payment system. For example, as a condition of membership in particular payment systems, national banks and Federal savings associations may provide open-ended indemnifications to Federal Reserve Banks that act as service providers for the payment systems.

This definition is consistent with the definition of open-ended liability in OCC Interpretive Letter 1140.

OCC Interpretive Letter No. 1157 (Nov. 12, 2017).

The OCC received one comment on this definition expressing concern that it did not clearly include a situation in which the indemnification giving rise to an open-ended liability is imposed directly upon the participant by the Federal Reserve Bank, which is acting as a service provider to payment system participants. The OCC agrees with this commenter that the participant would be exposed to open-ended liability in that case and is modifying the definition of “open-ended liability” to reflect the situation described by the commenter. As a result, open-ended liability in the final rule means liability for operational losses that is not capped under the rules of the payment system, and includes indemnifications of third parties provided as a condition of membership in the payment system.

Fourth, although memberships in payment systems expose national banks and Federal savings associations to a variety of risks, OCC legal precedent only has addressed whether a national bank may assume open-ended liability for operational losses at the payment system. The OCC defined “operational loss” as a charge resulting from sources other than defaults by other members of the payment system. The OCC pointed to examples listed in OCC Interpretive Letter 1140

and requested comment on whether these examples should be included in the definition of “operational loss.” The OCC also asked whether other examples should be included in that list. One commenter supported including the examples in the text of the regulation and recommended adding cybersecurity breaches. A second comment letter also supported adding cybersecurity breaches but did not believe the list of examples should be included in the definition of “operational loss” in the regulatory text. The OCC believes that adding the non-exhaustive list of examples to the body of the regulation will provide greater clarity. The OCC also agrees that it is appropriate to add cybersecurity breaches to the list. Thus, the final rule defines operational loss to mean a charge resulting from sources other than defaults by other members of the payment system. The final rule also adds examples of these operational losses. This nonexclusive list cites losses due to: employee misconduct, fraud, misjudgment, or human error; management failure; information systems failures; disruptions from internal or external events that result in the degradation or failure of services provided by the payment system; security breaches or cybersecurity events; or payment or settlement delays, constrained liquidity, contagious disruptions, and resulting litigation.

OCC Interpretive Letter No. 1140 (Jan. 13, 2014).

Finally, the OCC defined “payment system” in § 7.1026 to mean a “financial market utility” as defined in 12 U.S.C. 5462(6), wherever operating, and that includes both retail and wholesale payment systems. Section 5462(6) provides that “a financial market utility” means “any person that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the person” with certain exclusions.

This definition excluded derivatives clearing organizations registered under the Commodity Exchange Act

and clearing agencies registered under the Securities Exchange Act of 1934,

and foreign organizations that would be considered a derivatives clearing organization or clearing agency were it operating in the United States.

This definition therefore includes payment systems that operate either in the U.S. or in a foreign jurisdiction. The OCC requested comment on whether this definition appropriately encompasses both foreign and domestic payment systems that national banks and Federal savings associations may join. One commenter requested that the OCC provide guidance for banks and savings associations applying this definition to international clearing organizations or agencies that may not meet the technical requirements necessary to register under the Commodity Exchange Act or Securities Exchange Act of 1934. The OCC notes that the carve-out for clearing organizations and clearing agencies reflects that OCC precedent distinguishes between companies and organizations performing payments, clearing, and settlement functions.

While the proposed rule would codify OCC precedent related to payment system memberships, it would not affect OCC precedent applicable to memberships in clearing and settlement organizations. For example, a national bank or Federal savings association wishing to join a foreign organization subject to OCC Interpretive Letter Nos. 929 or 1102 would continue to follow the process outlined in that precedent rather than the process outlined in § 7.1026. The OCC believes this is sufficiently clear in the proposed rule

and, therefore, finalizes this definition as proposed.

Financial market utility “does not include: designated contract markets, registered futures associations, swap data repositories, and swap execution facilities registered under the Commodity Exchange Act, or national securities exchanges, national securities associations, alternative trading systems, security-based swap data repositories, and swap execution facilities registered under the Securities Exchange Act of 1934, solely by reason of their providing facilities for comparison of data respecting the terms of settlement of securities or futures transactions effected on such exchange or by means of any electronic system operated or controlled by such entities, provided that the exclusions in this clause apply only with respect to the activities that require the entity to be so registered” nor “any broker, dealer, transfer agent, or investment company, or any futures commission merchant, introducing broker, commodity trading advisor, or commodity pool operator, solely by reason of functions performed by such institution as part of brokerage, dealing, transfer agency, or investment company activities, or solely by reason of acting on behalf of a financial market utility or a participant therein in connection with the furnishing by the financial market utility of services to its participants or the use of services of the financial market utility by its participants, provided that services performed by such institution do not constitute critical risk management or processing functions of the financial market utility.” 12 U.S.C. 5462(6)(B).

7 U.S.C. 1

et seq.

15 U.S.C. 78a

et seq.

The OCC maintains separate precedent relevant to memberships in these organizations.

See, e.g.,

OCC Interpretive Letter No. 929 (Feb. 11, 2002); OCC Interpretive Letter No. 1102 (Oct. 14, 2008).

Id.

Notice requirements.

Proposed § 7.1026(c) required a national bank or Federal savings association to provide written notice to the appropriate OCC supervisory office at least 30 days prior to joining a payment system that would expose it to open-ended liability. If the payment system does not expose the national bank or Federal savings association to open-ended liability, the proposed rule required the national bank or Federal savings association to provide after-the-fact written notice within 30 days of joining a payment system. The OCC believes membership in a payment system that exposes members to open-ended liability creates additional risks for national banks and Federal savings associations. Thus, the OCC believes prior notice to the OCC is appropriate in these situations.

The proposed notice requirement would not apply to existing payment system memberships. However, as explained below, the proposed rule required national banks and Federal savings associations to continuously inform the OCC of changes to bank or savings association operations that would affect the institution's risk profile. Thus, the OCC would be made aware of any payment system membership at a bank or savings association even though the specific timing and information required by this proposed rule would not apply to existing payment systems memberships.

One comment letter supported this process. A second commenter, however, argued that the proposal may make it more difficult for a national bank or Federal savings association to join a new payment system because it would impose an additional regulatory burden not required for non-OCC regulated institutions. The OCC does not agree with this commenter. As explained above and in the preamble to the proposed rule, the notice requirement for payment system memberships codifies existing requirements from a series of interpretive letters governing national bank payment system memberships. Since the publication of these interpretive letters, OCC-regulated institutions have continued to join new payment systems. The OCC believes that this clarity facilitates payment systems memberships by OCC-regulated institutions rather than hindering them and therefore the OCC adopts paragraph (c) as proposed.

Content of notice.

Proposed § 7.1026(d) provided that all notices filed under § 7.1026(c) must include representations that the national bank or Federal savings association has complied with the safety and soundness review required by proposed § 7.1026(e)(1) before joining the payment system and will comply with the safety and soundness review and the notification requirements in proposed § 7.1026(e)(2) and (3) after joining the system. For after-the-fact notices pursuant to paragraph (c)(2), the proposed rule required a national bank or Federal savings association to include a representation that either the rules of the payment system do not impose liability for operational losses on members or that the national bank's or Federal savings association's liability for operational losses is limited by the rules of the payment system to specific and appropriate limits that do not exceed the lower of the legal lending limit specified by 12 CFR part 32 or a limit established for the national bank or Federal savings association by the OCC. One comment letter noted that the proposed notice requires that national banks and Federal saving associations complete their risk assessment of the payment system before joining. However, this commenter explained that some aspects of a national bank's or Federal savings association's risk management processes may occur after joining. Specifically, the commenter cited integration with a payment system's IT functions. The OCC recognizes that full access to the payment system's IT infrastructure may be necessary to analyze fully its potential risks. However, the OCC still expects banks and savings associations to identify in advance these limitations. Thus, the OCC is finalizing paragraph (d) as proposed, with a minor change in wording of the section heading in paragraph (d)(2).

Safety and soundness procedures.

The OCC relies upon a number of resources to communicate in detail its safety and soundness guidance for national bank and Federal savings association memberships in payment systems.

At a minimum, the OCC believes a national bank or Federal savings association must be able to identify, evaluate, and control its risks from membership in a particular payment system before joining the system and on an ongoing basis.

As a prerequisite to joining a payment system and on a continual basis after joining, proposed § 7.1026(e) required the national bank or Federal savings association to (1) identify and evaluate the risks posed by membership in the payment system, taking into account whether the liability of the bank or savings association is limited, and (2) measure, monitor, and control those risks. The preamble to the proposal explained that national banks and Federal savings associations should review the standards outlined in OCC Interpretive Letter 1140 and OCC Banking Circular 235 to assist with the requirements in paragraph (e). The proposal also required a national bank or Federal savings association to notify the appropriate OCC supervisory office if its ongoing risk management identifies a safety and soundness concern, such as a material change to the bank's or savings association's liability or indemnification responsibilities, as soon as that concern is identified and to take appropriate actions to remediate the risk. The OCC received several comments related to this section.

See, e.g.,

FFIEC IT Examination Handbook on Retail Payment Systems (Apr. 2016); FFIEC IT Examination Handbook on Wholesale Payment Systems (July 2004); Comptroller's Handbook: Payment Systems and Funds Transfer Activities (March 1990); OCC Banking Circular 235 (May 10, 1989).

For example, OCC Banking Circular 235 states “Management of each national bank is responsible for assessing risk in each payment, clearing, and settlement system in which the bank participates. Management must adopt adequate policies, procedures, and controls with respect to these activities.” The OCC applied this Banking Circular to Federal savings associations on Oct. 1, 2014.

First, several commenters responded favorably to the OCC's question about whether the characteristics from Interpretive Letter 1140 should be included in the final rule. In Interpretive Letter 1140, the OCC identified key components of a payment system that appropriately mitigates risk and indicated it would expect a national bank to consider these characteristics when analyzing the payment system. The OCC also explained in Interpretive Letter 1140 the characteristics of an effective risk management program at a national bank. These commenters thought doing so would provide greater certainty about the OCC's expectations. Although not an exhaustive list, the OCC agrees that listing the risk management program criteria from Interpretive Letter 1140 in the regulatory text would assist banks and savings associations as they conduct reviews of payment system memberships. The OCC is including in the final rule a new paragraph (f) that recites the criteria it previously outlined in Interpretive Letter 1140.

One commenter also asked the OCC to provide additional guidance about which of these criteria are most important and the circumstances under which each component should be considered in the analysis of a bank or savings association. The OCC does not believe it would be appropriate to identify further individual scenarios in which specific factors would apply because national banks and Federal savings associations are best positioned to evaluate the applicability and

importance of each factor given the wide variety of global payment systems as well as the varied complexity of and risk tolerances at individual banks and savings associations. The OCC expects banks and savings associations to review the standards and identify the components that are applicable to the payment system and financial institution at issue. Thus, the OCC is not including this information in the final rule.

Finally, a commenter asked that where the open-ended liability derives from a Federal Reserve Bank acting as a service provider to the payment system participant, the OCC clarify that due diligence and risk management activities should be related to the entity providing the service for which the indemnity or open-ended liability is imposed. The OCC agrees that national banks and Federal savings associations should evaluate the risks that derive from all aspects of the payment system membership, including the risks from service providers to whom the payment system member must indemnify or provide open-ended liability as a condition of membership. However, the OCC expects the due diligence and risk management analysis to apply whether the payment system membership introduces open-ended liability or not. The OCC believes that the language in paragraph (e) of the proposal is sufficiently clear and is adopting this section as proposed.

The OCC noted in the preamble to the proposed rule that a national bank's or Federal savings association's liability will vary from payment system to payment system. The rules of some payment systems may expose members to open-ended liability for operational losses but, in reality, the national bank's or Federal savings association's liability may be capped in some other way. For example, a jurisdiction could have a law that prohibits open-ended liability or restricts the amount of liability to the assets of the entity located in that jurisdiction. If that law applies to the payment system, it could effectively cap a member's operational liability. In other situations, a member may negotiate a separate agreement with a payment system that allows the member to limit its potential liability and, as a result, the risks of membership in that payment system. In recognition of these situations, the proposed rule permitted a national bank or Federal savings association to consider its open-ended liability to a particular payment system to be limited for purposes of the review required by proposed § 7.1026(e)(1) and (2) if the bank or savings association obtains an independent legal opinion prior to joining the payment system. That legal opinion must describe how the payment system allocates liability for operational losses and conclude the potential liability for the national bank or Federal savings association is limited to specific and appropriate limits that do not exceed the legal lending limit specified by 12 CFR part 32 or a lower limit established for the national bank or Federal savings association by the OCC. This legal opinion would enable the OCC to verify that the liability of the national bank or Federal savings association is limited even though the rules of the payment system do not provide any limits.

Two commenters objected to the independent legal opinion requirement. These commenters argued that the OCC should instead require national banks and Federal savings associations to follow a lower standard and provide just a reasonable basis for concluding that its liability is limited. These commenters also suggested that an opinion from in-house counsel should suffice. The OCC does not agree that lowering the standard would be appropriate. However, the OCC believes it is important to make clear that the legal opinion is

not

required to join any payment system; it is only required for the bank or savings association to treat its liability as limited when the payment systems rules indicate open-ended liability. The OCC, however, is persuaded by the commenters' view that an in-house legal opinion is sufficient. Thus, the OCC is amending the final rule to remove the requirement that the legal opinion be independent of the bank or savings association. The final rule does, however, specifically provide for a written opinion. Even with this change, the OCC expects that this option will be exercised rarely. In fact, the OCC believes that this option will be available only in unusual circumstances, typically for a payment system that operates in a foreign jurisdiction where the laws of that jurisdiction effectively limit the liability of the national bank or Federal savings association. The OCC is offering the written legal opinion as an additional option for institutions wishing to join a payment system in which the rules do not limit the liability of members, but the national bank or Federal savings association believes another factor effectively limits its potential liability. If a payment system's rules impose open-ended liability, national banks and Federal savings associations still may join the payment system even if they do not elect—or are unable to obtain—a written legal opinion provided that they conduct the appropriate safety and soundness analysis and provide the appropriate OCC supervisory office with the 30-day prior notice required by § 7.1026(c)(1). As the OCC explained in the preamble to the proposed rule, a national bank or Federal savings association that obtains a legal opinion may consider its open-ended liability to be limited so long as there were no material changes to the liability or indemnification requirements of the national bank or Federal savings association after the bank or savings association joined the payment system. If there is a material change, the national bank or Federal savings association may no longer rely on that written legal opinion to demonstrate that its liability is limited and must notify the appropriate OCC supervisory office and remediate its risks as described in § 7.1026(e)(3).

One commenter asked for clarification that, once a bank or savings association has joined a payment system and obtained a legal opinion, it does not need to undertake that process again unless there is a material change to the liability or indemnification provisions applicable to the bank or savings association. The OCC intended this result and, thus, is modifying the final rule to clarify that, so long as there are no material changes to the liability or indemnification requirements applicable to the bank or savings association since the issuance of the written legal opinion, the bank or savings association may consider its open-ended liability to be limited.

Establishment and Operation of a Remote Service Unit by a National Bank (New § 7.1027/Former § 7.4003)

Section 7.4003 provides that a national bank can establish and operate a remote service unit (RSU) pursuant to 12 U.S.C. 24(Seventh). This section also states that an RSU does not constitute a branch under 12 U.S.C. 36(j) and is not subject to State geographic or operational restrictions or licensing laws. Section 7.4003 defines an RSU as an automated facility, operated by a customer of a bank, that conducts banking functions, such as receiving deposits, paying withdrawals, or lending money. This section provides examples of an RSU, specifically listing an automated teller machine (ATM), automated loan machine, automated device for receiving deposits, personal computer, telephone, and other similar electronic devices. Finally, this section provides that an RSU may be equipped with a telephone or tele-video device that allows contact with bank personnel.

The OCC proposed to amend § 7.4003 to expand the definition of an RSU to include either an automated or unstaffed facility and to add drop boxes to the list of RSU examples. Although the OCC has historically treated drop boxes as branches, the OCC believes that interpreting both the terms ATM and RSU to require automation leads to incongruous results where a non-automated facility such as a drop box is considered a branch but an automated facility such as an ATM is not, despite a drop box functioning less like a full branch than an ATM. The OCC also proposed to move § 7.4003 to subpart A of part 7 as new § 7.1027 so that it would be in the same subpart as other branching provisions of part 7.

The OCC received one comment on the proposed amendments to § 7.4003. The commenter opposes the changes to § 7.4003 and states that excluding drop boxes from the definition of branch by including them in the definition of RSU is inconsistent with Supreme Court precedent. The commenter states that the change is inconsistent with OCC precedent and the OCC does not have the authority to include drop boxes and other unstaffed facilities within the RSU/ATM exclusion. The commenter also states that when Congress amended 12 U.S.C. 36(j) to exclude ATMs and RSUs from the definition of branch, it chose to only exclude automated facilities and purposefully chose not to exclude drop boxes or other unstaffed facilities that lack automation. Finally, the commenter states that regardless of where the RSU regulations are placed, to the extent that the OCC maintains that State operational and licensing restrictions are preempted with respect to non-branch offices, then, in expanding the scope of permissible non-branch office activities, the OCC is making a “preemption determination” under the National Bank Act that must comply with the procedural and substantive requirements applicable to such determinations.

These comments misunderstand the interaction between judicial precedent and the insertion of the term “remote service unit” into 12 U.S.C. 36(j) and ignore the plain language of 12 U.S.C. 36(j). The Supreme Court decision in

First National Bank in Plant City, Florida

Dickinson,

396 U.S. 122 (1969) (

Plant City

), which held that a drop box constituted a branch, was decided before Congress amended 12 U.S.C. 36(j) to exclude RSUs and ATMs from the definition of branch.

Therefore, the

Plant City

decision did not address whether drop boxes fit within the definition of an RSU and thus are exempted from the 12 U.S.C. 36 branching restrictions.

EGRPRA, Section 2204 (1996).

Interpreting 12 U.S.C. 36(j) in a way that defines ATMs and RSUs in a distinct manner is a better reading of the plain language of 12 U.S.C. 36(j) and leads to the logical conclusion that non-automated, unstaffed facilities such as drop boxes should be included in the definition of RSU. Specifically, interpreting “automated teller machine” and “remote service unit” to be synonymous (

i.e.,

automated, unstaffed facilities) would construe two different phrases to have the same meaning and renders the second phrase useless. Congress included the term “automated” in the phrase “automated teller machine” but did not include the term “automated” in the phrase “remote service unit,” suggesting that Congress did not necessarily intend for the term “remote service unit” to only apply to automated facilities. Though the OCC has historically treated drop boxes as branches based on the fact that drop boxes are not automated, the agency is now adopting a new position based on a reading of the plain language of the statute that avoids rendering statutory language superfluous and producing illogical results whereby drop boxes are considered branches despite having less branch-like functionality than ATMs.

The OCC also disagrees with the commenter's statement that the proposed amendments to § 7.4003 constitute a “preemption determination” under the National Bank Act. Case law is clear that it is Federal law, not State law, that determines what is considered a “branch” of a national bank for the purposes of 12 U.S.C. 36(j).

The OCC is merely clarifying how it interprets the ambiguous language in 12 U.S.C. 36(j). As noted above, Congress did not define “automated teller machine” or “remote service unit” in 12 U.S.C. 36(j), so the OCC must interpret these phrases to resolve this silence.

This is not a “preemption determination” pursuant to the National Bank Act. Accordingly, the OCC adopts these changes as proposed.

See First National Bank in Plant City, Florida

Dickinson,

396 U.S. 122, 133-34 (1969) (rejecting the contention by

amicus curiae

National Association of Supervisors of State Banks that State law definitions of what constitutes “branch banking” must control the content of the Federal definition of “branch.”).

See Chevron U.S.A., Inc.

Nat. Res. Def. Council, Inc.,

467 U.S. 837, 843 (1984) (“[I]f the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.”);

See also

Margin and Capital Requirements for Covered Swap Entities, 85 FR 39754, at 39764 (July 1, 2020) (discussing the views of the Board of Governors of the Federal Reserve System (Federal Reserve Board) on the application of sections 23A and 23B to swaps between a bank and its affiliate).

Second, the OCC does not believe any changes to the definition of “customer-driven” are necessary to confirm that a national bank, rather than its customer, may not have a speculative purpose. The proposed definition applies to a transaction entered into for a customer's “valid and independent business purpose.” The OCC recognizes that bank customers' valid and independent business purposes may include the customer obtaining directional exposure to an underlying, for example, as part of the customer's investment strategy.

The requirement that a transaction be “customer-driven” applies only to the national bank; it does not apply to the bank's customer. Therefore, the OCC does not believe that any changes to the definition of “customer-driven” are necessary to confirm that the rule does not limit a national bank's customer's valid and independent business purpose.

See, e.g.,

OCC Interpretive Letter No. 1090 (Oct. 25, 2007).

Third, the OCC declines to adopt the commenter's proposed interpretation that a derivative transaction entered into by a national bank as a financial intermediary would be viewed as “customer-driven,” so long as the national bank and its customer have bilaterally negotiated and agreed to the terms of the transaction, regardless of the execution mechanism selected by the bank and its customer. A national bank may use both over-the-counter trades or trading platforms to execute

customer-driven transactions. However, the fact that a trade is bilaterally negotiated does not, on its own, mean that the trade is customer-driven (

i.e.,

is entered into for a customer's valid and independent business purpose and does not have the principal purpose of delivering to a national bank assets that the national bank could not invest in directly). For example, a bilaterally negotiated transaction between a national bank and a third party that, under the facts and circumstances, has the purpose of giving the national bank speculative exposure to underlying commodity or security prices would not be considered customer-driven under this definition.

Finally, the OCC confirms that the language in the definition of “customer-driven” stating that the principal purpose of the transaction cannot be to deliver to a national bank assets that the national bank could not invest in directly does not preclude a bank from engaging in permissible physically-settled derivatives activities. Paragraphs (c)(4) and (5) of the final rule explicitly permit national banks to engage in customer-driven physically-settled derivatives financial intermediation transactions. For the foregoing reasons, the OCC is adopting the definition of “customer-driven” as proposed.

•

Perfectly-matched.

The proposal included a definition of “perfectly-matched” that was substantially similar to prior OCC interpretive letters. Specifically, the proposal defined perfectly-matched to mean two back-to-back derivative transactions that offset risk with respect to all economic terms (

e.g.,

amount, maturity, duration, and underlying). The preamble to the proposal specified that, consistent with OCC interpretive letters, this definition would allow transactions to be considered “perfectly-matched” despite a difference in price between two derivatives when that difference reflects the bank's intermediation fee (in the form of a spread).

OCC Interpretive Letter No. 1110 (Jan. 30, 2009).

The OCC received one comment on this proposed definition. First, this commenter said the OCC should adopt a broader concept of “appropriately hedged” rather than distinguishing between the definitions of “perfectly-matched” and “portfolio-hedged,” which the commenter viewed as unnecessary. This commenter argued that a bifurcated definitional approach could potentially create ambiguity as to whether there may be certain types of derivative transactions that, while appropriately hedged in some manner so as to offset the market risk of such transactions, may not fall within either technical definition, and thus would not be bank-permissible. This commenter further argued that, if the final rule maintains the distinction between “perfectly-matched” and “portfolio-hedged,” it should expressly confirm that any derivative transaction the risks of which are appropriately offset, whatever the technique, will fall under one of these two definitions. The commenter argued that, if a permissible hedging technique does not fall within the definition of “perfectly-matched,” then it should be assumed to fall within the definition of “portfolio-hedged.”

The OCC disagrees with the commenter's view that these definitions are unnecessary and that they create ambiguity. OCC interpretations have long used the terms “portfolio-hedged” and “perfectly-matched” in analyzing the permissibility of national bank derivatives activities, and the distinction between these two activities is well-established and useful to the OCC's supervisory activities. The commenter describes certain types of transactions that they believe may not fall into the definition of either perfectly-matched or portfolio-hedged, such as using two or more derivatives to hedge a single customer transaction.

The OCC agrees these transactions generally would not fall into the definition of perfectly-matched, as OCC interpretive letters have used this definition consistently to describe mirror transactions with matching economic terms. Customer-driven intermediation transactions that are not perfectly-matched are still permissible if they are conducted as part of a portfolio-hedged derivatives program. As described further below, national banks may permissibly conduct such transactions as part of a portfolio-hedged derivatives program if the portfolio of transactions is hedged based on net unmatched positions or exposures in the portfolio. In response to the commenter's example of hedging a single derivative with multiple offsetting derivatives, the OCC confirms that a national bank would not be precluded from managing derivatives within a portfolio-hedged program on such a basis. The transactions may be permissible as portfolio-hedged derivatives transactions as long as the bank appropriately hedges net residual risks resulting from the offsetting derivatives transactions.

The commenter also raised the example of hedging an equity derivative by holding physical equity positions. This example is discussed below in the section addressing physical hedging activities.

The commenter also proposed that the OCC adopt a unified term such as “appropriately hedged” in lieu of “perfectly-matched” and “portfolio-hedged.” The commenter suggested that such a definition should permit “appropriate and effective” hedging but does not specifically propose how this term should be defined. The definitions “perfectly-matched” and “portfolio-hedged” encompass the methods of hedging a national bank's market risk arising from permissible derivatives financial intermediation activities—whether at the individual transaction level through back-to-back transactions or at the level of net risks within a derivatives portfolio. The OCC believes that incorporating and defining these longstanding hedging approaches reflecting the OCC's interpretive letters will not cast doubt on the permissibility of currently-recognized national bank derivatives activities; furthermore, it reflects the OCC's established expectation that, for derivatives activities relying on portfolio hedging for their permissibility, the national bank should have the appropriate hedging skills and sophistication to manage the net risks of its derivatives portfolio. Accordingly, the final rule retains the definitions for “perfectly-matched” and “portfolio-hedged” as proposed.

The commenter further said that, if the distinction between perfectly-matched and portfolio hedged is retained, the definition of “perfectly-matched” should be revised to treat corresponding transactions as perfectly-matched hedges so long as they substantially offset risk with respect to all material terms, so as to make clear that differences between the transaction with little or no effect on market risk (

e.g.,

different maturity dates between the customer derivative and the offsetting future, or different margin arrangements) do not bar the transactions from being treated as perfectly-matched.

The OCC disagrees with this proposed interpretation. OCC precedents have long defined perfectly-matched transactions as transactions that offset risk with respect to all economic terms (

e.g.,

amount, maturity, duration, and underlying). The OCC has described a perfectly-matched

transaction as one that does not expose the national bank to price risk associated with the underlying so that the main risk to the bank is credit risk.

Two transactions with different economic terms could expose the national bank to other risks. For example, two transactions with different maturity dates could expose the national bank to price risk in the time period between the two maturity dates. Accordingly, the OCC is not expanding the definition of “perfectly-matched” to incorporate such transactions. However, as described above, such transactions may be permissible as part of a portfolio-hedged derivatives program if the national bank appropriately manages net unmatched exposures in the derivatives portfolio.

The commenter also discussed physically-hedged transactions that are hedged on a transaction-by-transaction basis. This example is discussed below in relation to the permitted physical hedging activities under § 7.1030(c)(5). As discussed below, such transactions are not considered perfectly-matched under the final rule but are addressed in § 7.1030(c)(5).

See, e.g.,

OCC Interpretive Letter No. 1060 (Apr. 26, 2006).

•

Portfolio-hedged.

The proposal included a definition of portfolio-hedged that was substantially similar to prior OCC interpretive letters. Specifically, the OCC proposes to define “portfolio-hedged” to mean that a portfolio of derivatives transactions is hedged based on net unmatched positions or exposures in the portfolio. The proposed definition refers to unmatched “positions or exposures” to clarify that hedging on a portfolio basis may involve hedging based on various risk exposures with different instruments in accordance with applicable policies and procedures and risk limits of the national bank. This definition is consistent with OCC interpretations that have typically used “portfolio-hedged” to describe the practice of hedging based on net residual risk position in a portfolio of positions.

The OCC has explained that this method of hedging can reduce transactional costs and operational risks because fewer transactions need to be executed relative to the number of transactions executed under perfectly-matched hedging (in which the national bank must offset each transaction on an individual basis).

As described above, a national bank would not be precluded from managing derivatives within a portfolio-hedged program on a more specific basis (for example, by managing the risk of a particular derivative transaction by entering into two or more offsetting transactions). The OCC did not receive any additional comments on the definition of portfolio-hedged and is adopting the definition as proposed.

See e.g.,

OCC Interpretive Letter No. 1073 (Oct. 19, 2006); OCC Interpretive Letter No. 1060.

Id.

•

Physical hedging or physically-hedged.

The proposal defined “physical hedging” and “physically-hedged” to mean holding title to or acquiring ownership of an asset (for example, by warehouse receipt or book entry) to solely manage the risks arising out of permissible customer-driven derivatives transactions. The OCC intended this definition to be consistent with the description of commodities physical hedging activities that the OCC has identified as permissible in prior interpretive letters and in OCC Bulletin 2015-35 (Aug. 4, 2015). Under the proposal, this definition also applies to physical hedging of customer-driven derivatives referencing securities. The OCC did not receive any comments on the definition of “physically-hedged” and is adopting the definition as proposed.

•

Physical settlement or physically-settled.

The proposal defined “physical settlement” or “physically settled” to mean accepting title to or acquiring ownership of an asset. The preamble to the proposal explained that physical settlement stands in contrast to cash-settled transactions, in which counterparties do not exchange the underlying assets. The preamble to the proposal also explained that physical settlement includes transitory title transfer, which is discussed below. The OCC did not receive any comments on the definition of “physical settlement” or “physically-settled” and is adopting the definition as proposed.

•

Transitory title transfer.

The proposal defined “transitory title transfer” to mean a transaction that is settled by accepting and immediately relinquishing title to an asset. The proposal explained that this definition is intended to be consistent with prior OCC interpretive letters, which explain that transitory title transfer is a means of physical settlement in which a counterparty only briefly holds title to the underlying asset.

The preamble explained that, consistent with prior OCC interpretations, transitory title transfer does not entail a national bank taking physical possession of a commodity.

The OCC did not receive any comments on the definition of transitory title transfer and is adopting the definition as proposed.

See, e.g.,

OCC Interpretive Letter No. 962 (Apr. 21, 2003).

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