Membership of State Banking Institutions in the Federal Reserve System

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Regulation H; Docket No. R-0838]

Membership of State Banking Institutions in the Federal Reserve

System

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is amending its Regulation H to implement a

provision of the Depository Institutions Disaster Relief Act of 1992

that authorizes state member banks to make investments designed

primarily to promote the public welfare to the extent permissible under

state law and subject to regulation by the Board. The amendment would

permit state member banks to make certain public welfare investments

without prior approval and other public welfare investments with

specific Board approval. The amendment also addresses the procedural

aspects of these investments.

EFFECTIVE DATE: January 9, 1995.

FOR FURTHER INFORMATION CONTACT: Stephanie Martin, Senior Attorney

(202-452-3198), Legal Division; Sandra Braunstein, Manager for

Community Affairs, (202-452-3378), Division of Consumer and Community

Affairs; Larry Cunningham, Supervisory Financial Analyst, Division of

Banking Supervision and Regulation (202-452-2701); for users of the

Telecommunications Device for the Deaf (TDD) only, Dorothea Thompson

(202-452-3544); Board of Governors of the Federal Reserve System,

Washington, DC 20551.

SUPPLEMENTARY INFORMATION: The Depository Institutions Disaster Relief

Act of 19921 amended the Federal Reserve Act2 to loosen the

restriction on the ability of state member banks to purchase, sell,

underwrite, and hold investment securities. The amendment allows state

member banks to make investments that are designed primarily to promote

the public welfare. The investment must not violate state law or expose

the bank to unlimited liability. The aggregate of the bank's public

welfare investments must not exceed the sum of five percent of the

bank's capital stock actually paid in and unimpaired and five percent

of its unimpaired surplus fund. The Board may waive this limit by

order, on a case-by-case basis, and permit a bank to make investments

in an amount not exceeding the sum of ten percent of the capital stock

actually paid in and unimpaired and ten percent of the unimpaired

surplus fund of the bank. Finally, the Board must limit a bank's

investments in any one project.

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\1\Pub. L. 102-485, 106 Stat. 2771, 2774, section 6(b).

\2\Section 9, paragraph 23 (12 U.S.C. 338a).

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In the past, the Board has dealt with requests by state member

banks to make public welfare investments on a case-by-case basis. To

reflect the recent Federal Reserve Act amendment and to facilitate

public welfare investments by state member banks, the Board is amending

Regulation H (12 CFR Part 208) by adding a new section entitled

Community Development and Public Welfare Investments. This amendment

will permit state member banks to make certain public welfare

investments without prior approval.

Summary of Final Rule

The final rule identifies classes of public welfare investments

that do not require prior approval, leaving less common investments and

investments of more than five percent of a bank's capital stock and

surplus subject to case-by-case review. Under the final rule, a state

member bank may make an investment, without prior approval, if the

investment previously has been determined to be a public welfare

investment by the Board or the Comptroller of the Currency or is an

investment in a community development financial institution as defined

in the Community Development Banking and Financial Institutions Act of

1994.3 In addition, the rule allows state member banks to invest

without prior approval in an entity established solely to engage in one

or more of the following activities: low- and moderate-income housing;

nonresidential real-estate development in a low- or moderate-income

area that is targeted towards low- and moderate-income persons; small

business development in a low- or moderate-income area; job training or

placement for low- and moderate-income persons; job creation in a low-

or moderate-income area for low- and moderate-income persons; and

technical assistance and credit counseling to benefit community

development.

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\3\Title I of Pub. L. 103-325, 108 Stat. 2160, section 103(5).

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The final rule uses the Department of Housing and Urban

Development's (HUD's) Chapter 69 Community Development definition of

low- and moderate-income persons and the Small Business

Administration's definition of small business. Low- or moderate-income

area is defined as an area in which the median family income is less

than eighty percent of the median family income of the Metropolitan

Statistical Area, or, for non-metropolitan areas, the state.

Under the final rule, the investment must not violate state law or

expose the bank to unlimited liability. The rule limits aggregate

public welfare investments without prior approval to up to five percent

of the capital stock and surplus of the state member bank and limits

any single investment without prior approval to not more than two

percent of a bank's capital stock and surplus. In addition, to make

public welfare investments without prior approval, a state member bank

must be at least adequately capitalized and rated a composite CAMEL

``1'' or ``2'' and at least ``satisfactory'' in its last consumer

compliance examination. In addition, the bank must not be subject to

any written agreement, cease and desist order, capital directive, or

prompt corrective action directive issued by the Board or a Federal

Reserve Bank acting under delegated authority. A state member bank must

receive Board approval before making an investment that falls outside

of the rule's parameters. In no event may aggregate public welfare

investments exceed ten percent of the bank's capital stock and surplus.

Within 30 days after making a public welfare investment without

prior approval, a state member bank must advise its Reserve Bank of the

amount of the investment and the identity of the entity in which the

investment is made. If a bank has a preexisting public welfare

investment on the rule's effective date that would not require prior

approval under the rule, the bank must notify its Reserve Bank of the

investment within sixty days after the effective date of the rule. For

other preexisting public welfare investments, the bank must apply to

the Board for approval of the investment within one year after the

rule's effective date.

If a public welfare investment ceases to meet the statutory

requirements or any requirements established by the Board in granting

approval, the bank must divest itself of the investment to the extent

that the investment ceases to meet those requirements. This divestiture

is governed by the same requirements as divestitures of interests

acquired by a lending subsidiary of a bank holding company or a bank

holding company itself in satisfaction of a debt previously contracted.

(See 12 CFR Sec. 225.140.) Divestiture is not required if the

investment ceases to meet the non-statutory requirements concerning

capital, examination ratings, and enforcement actions.

Summary of Comments and Section-by-Section Analysis

The Board proposed amendments to Regulation H regarding public

welfare investments by state member banks in May 1994 (59 FR 27247, May

26, 1994). The Board received nine public comments on the proposed

rule: four from trade associations, three from community development

organizations, and two from bank holding companies. The public comments

and the Board's responses to the comments are discussed in the section-

by-section analysis below.

Section 208.21(a)(1)

Definition of low- and moderate-income area. The Board proposed to

define ``low- and moderate-income area'' as an area in which the median

family income is less than eighty percent of the median family income

of the Metropolitan Statistical Area, or, for non-metropolitan areas,

the state. One commenter stated that ``low- and moderate-income area''

should include disadvantaged areas designated by statute as requiring

special government assistance that might not qualify under the proposed

definition.

The Board has addressed the concern that the proposed rule's

coverage was too narrow by amending Sec. 208.21(b)(1) to broaden the

universe of investments that are permissible without prior approval.

(This amendment is discussed below.) The Board has adopted the

definition as proposed.

Section 208.21(a)(2)

Definition of low- and moderate-income person. The proposed rule's

definition of ``low- and moderate-income person'' incorporated the

definition in Chapter 69 of the HUD statute on community development.

One commenter supported use of the HUD standard of 80% of median income

in defining the upper limit for qualifying investments. The Board has

adopted the proposed definition, with a minor citation correction.

Section 208.21(a)(3)

Definition of small business. The Board proposed to incorporate the

definition of ``small business'' as it applies to entities eligible for

financial or other assistance under the Small Business Administration's

Small Business Investment Company and Development Company programs. The

Board received no public comments on this definition and has adopted it

as proposed.

Section 208.21(b)(1)(i)-(iii)

Investments not requiring prior approval. The proposed rule

provided that state member banks could make an investment without prior

approval if the Board has determined the investment is a public welfare

investment or if the entity in which the bank invests engages solely in

one or more specified community development activities.

One commenter stated that the proposed standards were narrower than

the Federal Reserve Act's requirements and could exclude public-purpose

projects and mixed use projects where low- and moderate-income

residents are only some of the project's beneficiaries, particularly in

rural areas where low- and moderate-income families are not

concentrated.

In the final rule, the Board has broadened the scope of investments

that are permissible without prior approval. Specifically, a state

member bank may invest in an entity if the Comptroller of the Currency

(OCC) has determined, by order or regulation, that investment in that

entity by a national bank is a public welfare investment under section

5136 of the Revised Statutes (12 U.S.C. 24). This provision will

provide greater consistency in investments that are permissible for

state member banks and national banks and will eliminate the need in

many cases for determinations by two regulatory agencies. In addition,

under the final rule a state member bank may, without prior approval,

invest in a community development financial institution as defined in

section 103(5) of the Community Development Banking and Financial

Institutions Act of 1994. Congress has found that community development

financial institutions play an important role in promoting economic

revitalization and development in troubled communities and has

established a special fund to invest in and assist these institutions.

Therefore, the Board believes that investment in community development

financial institutions by state member banks should be considered

public welfare investments.

Additionally, under Sec. 208.21(d), the Board could make a general

determination for investments in entities engaged in a particular

activity. For example, if the Board determined that an investment in an

entity engaged in development activities in a federally-specified

enterprise zone was a permissible public welfare investment, it might

also determine that an investment in any similar entity engaged in

similar activities would not require prior approval.

Two commenters argued that the proposed restrictions were too

broad. These commenters stated that the prior approval exemption should

be provided only for those investments that address the needs of low-

and moderate-income persons and communities in ways not readily

available through the private market. These commenters suggested that

the Board add criteria similar to those in the OCC's rules on public

welfare investments. These commenters also suggested that a qualifying

public welfare investment should be required to include nonbank

community involvement to ensure that low- and moderate-income community

residents will benefit from the investment.

Generally, the ability to obtain funds in the private market is a

matter of price rather than access. The rate at which funding in the

private market would be prohibitive would vary with each project and

would be difficult to specify in a rule of general application. In

addition, the Board believes that the community development projects

described by the rule will usually have some form of community support.

The Board believes that any benefit in requiring a showing of non-bank

community involvement in a project would be outweighed by the

additional regulatory burden involved.

One commenter requested that the Board clarify that investments may

be made in either non-profit or for-profit community development

projects without prior approval. The final rule does not distinguish

between non-profit and for-profit investments. Either type of

investment is permissible as long as it meets the rule's requirements.

Section 208.21(b)(1)(iv)

The proposed rule provided that a state member bank could invest

without prior approval in an entity that engages solely in one or more

specified community development activities.

Engaged solely. Two commenters stated that requiring an entity to

engage solely in one of the specified activities is too restrictive.

The commenters noted that many companies invest in community

development but are diverse and multi-functional. One commenter

suggested that the Board substitute ``primarily'' for ``solely.'' The

Board believes that the term ``primarily,'' which could be interpreted

to mean 51 percent or even lower, is not narrow enough for purposes of

investments without prior approval. If a state member bank wishes to

invest in an entity that does not engage solely in the listed

activities, it may ask for a Board determination that the investment is

a public welfare investment. The Board has retained the ``solely''

language in the final rule.

Where the Board used the term ``primarily'' in the proposed rule,

it intended to cover those projects targeted towards low- and moderate-

income persons. The Board has substituted the phrase ``targeted

towards'' for ``primarily'' in the final rule (Sec. 208.21(b)(1)(iv)

(B) and (D)).

Indirectly engaged. One commenter asked that the Board clarify

whether the rule covers investment in a firm that engages in enumerated

activities through a wholly-owned subsidiary. The Board believes that

investment in an entity that engaged solely in the listed activities

through one or more subsidiaries would be permissible. The Board has

revised the final rule (Sec. 208.21(b)(1)(iv)) to clarify this point.

Lending activity. The Board has revised the rule to allow

investments without prior approval in entities engaged solely in public

welfare lending activities.

Section 208.21(b)(1)(iv)(A)

Investments in low- and moderate-income housing. The Board proposed

to allow investment without prior approval in entities that are engaged

in certain activities related to low- and moderate-income housing. The

Board specifically requested comment on whether low- and moderate-

income housing should be defined as housing where a majority of the

units are occupied by low- and moderate-income persons (as proposed) or

whether the definition should be based on other federal programs, such

as the low-income housing credit in section 42 of the Internal Revenue

Code. The Board received six public comments on this issue.

Three commenters supported the test proposed by the Board. One of

these commenters stated that section 42 of the Internal Revenue Code

should apply only if a corporation makes an investment in a housing

project specifically to benefit from a low-income housing tax credit.

Another of these commenters suggested that the rule's definition of

low- and moderate-income housing reflect the current HUD definition,

which stratifies the definition further to include very low income

designations.

One commenter stated that requiring a majority of residential units

to be occupied by low- and moderate-income persons would tend to

segregate the poor from people who could help them prosper. This

commenter suggested that the test should be satisfied by any housing

``occupied by low- to moderate-income persons,'' or if necessary,

including a low occupation threshold amount such as 15 percent.

Two commenters suggested that a qualifying investment should meet

the ``majority of units'' requirement as well as a requirement that

either (1) at least 20 percent of the units be occupied by individuals

whose incomes do not exceed 50 percent of area median income, or (2) at

least 40 percent of the units be occupied by individuals whose incomes

do not exceed 60 percent of the area median income, adjusted for family

size. The commenters believed that the additional restriction (which is

based on the definition of ``low-income housing project'' in the

Internal Revenue Code) would insure that qualifying investments would

provide a minimum level of benefit to low-income persons.

The Board believes that the additional restrictions on the test for

low- or moderate-income housing would not provide sufficient

flexibility in the final rule. However, the Board believes that tax

credits could provide a powerful incentive for banks to invest in low-

income housing. Therefore, the Board has adopted a revised version of

the low- and moderate-income housing provision that would allow

investment in residential property in which a majority of the units are

occupied by low- or moderate-income persons or that meets the

definition of a qualified low-income building under section 42 of the

Internal Revenue Code.

Section 208.21(b)(1)(iv)(B)

Investments in nonresidential real property. The Board proposed to

allow investment without prior approval in entities that are engaged in

certain activities related to nonresidential real property or other

assets located in a low- or moderate-income area and to be used

primarily by low- and moderate-income persons. Two commenters strongly

supported the inclusion of this category. Other than the revision to

the term ``primarily,'' the Board has adopted this provision as

proposed.

Section 208.21(b)(1)(iv)(C)

Small businesses in low- or moderate-income area. The Board

proposed to allow investment without prior approval in entities that

invest in small businesses located in a low- or moderate-income area to

stimulate economic development. Two commenters suggested that the Board

add emphasis on minority small businesses, which are an especially

underserved segment of the small business community. The Board believes

it would be difficult to determine what criteria to use to identify

disadvantaged small businesses and has not adopted this suggestion.

One commenter stated that the Board should permit investments in

all small businesses, as such investments would stimulate economic

development regardless of whether the businesses are located in low- or

moderate-income areas. The expansion of the types of investment

permissible without prior approval (Sec. 208.21(b)(1) (ii) and (iii))

should help address the concerns raised by this commenter. The Board

has adopted the provision as proposed.

Section 208.21(b)(1)(iv) (D) and (E)

Job training and employment opportunities. The Board proposed to

allow investment without prior approval in an entity that (i) invests

in, develops, or otherwise assists job training or placement facilities

or programs that will be used primarily by low- and moderate-income

persons or (ii) invests in an entity located in a low- or moderate-

income area if that entity creates long-term employment opportunities,

a majority of which will be held by low- and moderate-income persons.

The Board received no public comments on these provisions. Other than

the revision to the term ``primarily,'' the Board has adopted these

provisions as proposed.

Section 208.21(b)(1)(iv)(F)

Investments in credit counseling. The Board proposed to allow

investment without prior approval in entities that provide technical

assistance, credit counseling, research, and program development to

low- and moderate-income persons, small businesses, or nonprofit

corporations to help achieve community development. Two commenters

strongly supported the inclusion of this category. The Board has

adopted this provision as proposed.

Section 208.21(b)(2)

Permitted by state law. The Board proposed to allow investments

without prior approval only if the investment is permitted by state

law. The Board received no public comments on this provision and has

adopted it as proposed.

Section 208.21(b)(3)

Limited liability. The Board proposed to allow investments without

prior approval only if the investment will not expose the bank to

liability beyond the amount of the investment. The Board received no

public comments on this provision and has adopted it as proposed. This

provision would preclude a state member bank from acting as a general

partner. A general partner is normally liable for all of the debts of

the partnership, which could be greater than the partner's investment.

Section 208.21(b) (4) and (5)

Percentage of capital limitation. The Board proposed to allow

investments without prior approval only if the investment does not

exceed the sum of two percent of the bank's capital stock and surplus

and if the aggregate all such investments of the bank does not exceed

the sum of five percent of its capital stock and surplus. The Board

received no comments on this provision and has adopted it as proposed.

Definition of capital. The Board proposed to define capital stock

and surplus as it is defined in a Board interpretation on state member

bank undivided profits (12 CFR Sec. 250.162). One commenter suggested

that the Board define capital and surplus as total Tier 1 and Tier 2

capital, plus that balance of a bank's allowance for loans and lease

losses not included in Tier 1 and Tier 2 capital. The commenter stated

that this information can be easily gleaned from call report, would

ease compliance, and would be consistent with the OCC's proposed

definition of capital and surplus for purposes of lending limits. The

Board believes that the capital definition suggested by the commenter

is broader than anticipated by the ``capital and surplus'' language of

the statute. For many years, rules establishing limitations on the

activities of state member banks in terms of a bank's capital structure

have used a well-established definition of capital stock and surplus

that includes undivided profits plus allowance for loan and lease

losses. As these items are readily ascertained from the Schedule RC

Balance Sheet report (total equity capital (line 28); allowance for

loan and lease losses (line 4b), the Board has adopted the definition

of capital and surplus as proposed.

Section 208.21(b) (6)-(8)

Requirements regarding bank condition. The Board proposed to allow

investments without prior approval only if the bank is well capitalized

or adequately capitalized, received a composite CAMEL rating of ``1''

or ``2'' as of its most recent examination, and is not subject to any

written agreement, cease and desist order, capital directive, or prompt

corrective action directive issued by the Board or a Federal Reserve

Bank.

One commenter stated that CAMEL 3-rated institutions do not pose

the same risks to safety and soundness as 4- and 5-rated institutions.

The commenter suggested that an improving 3-rated institution with

adequate capital should be able to request a waiver from the Board to

forego the application process for future public welfare projects

(consistent with the OCC's public welfare investment rule). The Board

believes, however, that it would need to review a 3-rated bank's status

upon each public welfare investment request to determine whether the

bank was improving and that a blanket application waiver for improving

3-rated banks would not be appropriate.

The Board has made two revisions to the proposed provision. First,

the Board has expanded this provision to preclude investment without

prior approval by banks operating under a memorandum of understanding.

Second, the final rule will require a bank to have overall ratings of

at least ``satisfactory'' from its most recent consumer compliance

examination in order to make a public welfare investment without prior

approval.

Section 208.21(c)

Notice to Reserve Bank. The Board proposed to require a bank that

made an investment without prior approval to notify its Federal Reserve

Bank within 30 days of making the investment. The proposed notice would

include the amount of the investment and the identity of the entity in

which the investment is made. The Board received no public comments on

this provision and has adopted it as proposed.

Section 208.21(d)

The Board proposed that a state member bank would be able to make

public welfare investments other than those specified in the regulation

with prior Board approval.

Scope of public welfare investments. One commenter suggested that

the Board provide further guidance as to the boundaries of public

welfare investments that are not directly related to low- and moderate-

income communities or families. The Board's expansion of investments

permissible without prior approval should address this commenter's

concerns.

Application procedures. Three commenters suggested that the rule

should address application procedures and time limits for public

welfare investments. The Board has added provisions to Sec. 208.21(d)

to describe the minimum information that a public welfare investment

request should contain in order to enable the Board to determine

whether the investment would meet the Federal Reserve Act's

requirements. The final rule also provides that the Board will normally

act on requests within 60 days, unless the Board notifies the bank that

a longer period is necessary. Accordingly, a bank should request Board

approval of a public welfare investment at least 60 days prior to the

day the bank wishes to make the investment.

Section 208.21(e)

Divestiture. The Board proposed that a bank must divest itself of

an investment made in accordance with the regulation to the extent that

the investment exceeds the scope of, or ceases to meet, the

requirements of the regulation. The Board proposed that the divestiture

be made in the manner specified in Regulation Y for interests acquired

by a lending subsidiary of a bank holding company or the bank holding

company itself in satisfaction of a debt previously contracted. The

Board received no public comments on this provision and has adopted it

as proposed.

Section 208.21(f)

Preexisting investments. Under the Board proposal, if a state

member bank has an ongoing public welfare investment that would not

require prior approval under the regulation and was made prior to the

rule's effective date, the bank must notify its Federal Reserve Bank of

the investment within 60 days after the effective date. For other

ongoing investments made prior to the rule's effective date, the bank

must request Board approval within one year of the effective date. The

Board received no public comments on these provisions and has adopted

them as proposed.

Other Comments

Community Reinvestment Act

Three commenters requested that the Board address the relationship

between the proposed rule and banks' obligations under the Community

Reinvestment Act (CRA). One commenter was concerned that the new

investment levels would be interpreted as mandatory for state member

banks by some community groups and requested that the Board clarify the

role such investments should play in bank's overall CRA program.

Another commenter believed that public welfare investments should be

considered in assessment of a bank's CRA compliance in order to

encourage bank participation in lending consortia outside the bank's

delineated service area. A third commenter stated that the types of

investments envisioned in this rule should not supplant the bank's

responsibilities under the CRA.

The Board has determined not to refer to the CRA in this

regulation. The requirements of the CRA will continue to apply to state

member banks. Public welfare investments that are authorized under this

regulation may or may not qualify for CRA ``credit,'' depending on the

nature of the investment and the requirements of the CRA.

Regulation Y

Two commenters urged the Board to adopt a corresponding

interpretation to Regulation Y (12 CFR Part 225) so that the treatment

of bank holding companies and state member banks will be consistent.

The Board has adopted an interpretation to Regulation Y, published

elsewhere in today's Federal Register.

Capital Treatment

One commenter requested that the Board address the capital effects

of this proposal. The Board believes that public welfare investments

should not receive special accounting, capital, or examination

treatment.

Regulatory Flexibility Act Certification

Pursuant to section 605(b) of the Regulatory Flexibility Act (5

U.S.C. 605(b)), the Board certifies that the amendments to Regulation H

will not have a significant economic impact on a substantial number of

small entities, and that any impact on those entities should be

positive. The amendments will reduce the regulatory burden for many

state member banks by permitting them to make certain investments that

had previously required Board approval, and will have no effect in

other cases.

Paperwork Reduction Act

In accordance with section 3507 of the Paperwork Reduction Act of

1980 (44 U.S.C. 3507), the information collection has been reviewed by

the Board under the authority delegated to the Board by the Office of

Management and Budget (5 CFR Part 1320, Appendix A) after consideration

of the comments received during the public comment period.

The collections of information in this regulation are in 12 CFR

208.21. This information is required to allow oversight of state member

banks while permitting them to make certain public welfare investments.

This information will be used to track public welfare investments and

approve or deny certain new investments.

The estimated annual burden per respondent varies from 2 to 10

hours, depending on individual circumstances, with an estimated average

of 2.3 hours. There will be an estimated thirty-five respondents filing

investment notifications, averaging 2 hours, an estimated fifteen

respondents filing applications, averaging 2.5 hours, and an estimated

two respondents filing divestiture notifications, averaging 5 hours.

List of Subjects in 12 CFR Part 208

Accounting, Agriculture, Banks, Banking, Confidential business

information, Crime, Currency, Federal Reserve System, Mortgages,

Reporting and recordkeeping requirements, Securities.

For the reasons set forth in the preamble, the Board is amending 12

CFR Part 208 as set forth below:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL

RESERVE SYSTEM (REGULATION H)

1. The authority citation for Part 208 continues to read as

follows:

Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461,

481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105,

3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g),

78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318.

2. A new Sec. 208.21 is added to Subpart A to read as follows:

Sec. 208.21 Community development and public welfare investments.

(a) Definitions--(1) Low- or moderate-income area means:

(i) One or more census tracts in a Metropolitan Statistical Area

where the median family income adjusted for family size in each census

tract is less than eighty percent of the median family income adjusted

for family size of the Metropolitan Statistical Area; or

(ii) If not in a Metropolitan Statistical Area, one or more census

tracts or block-numbered areas where the median family income adjusted

for family size in each census tract or block-numbered area is less

than eighty percent of the median family income adjusted for family

size of the State.

(2) Low- and moderate-income persons has the same meaning as low-

and moderate-income persons as defined in 42 U.S.C. 5302(a)(20)(A).

(3) Small business means a business that meets the size eligibility

standards of 13 CFR 121.802(a)(2).

(b) Investments that do not require prior Board approval.

Notwithstanding the provisions of section 5136 of the Revised Statutes

(12 U.S.C. 24 (Seventh)) made applicable to State member banks by

paragraph 20 of section 9 of the Federal Reserve Act (12 U.S.C. 335), a

State member bank may make an investment, without prior Board approval,

if the following conditions are met:

(1) The investment is in a corporation, limited partnership, or

other entity:

(i) Where the Board has determined that an investment in that

entity or class of entities is a public welfare investment under

paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a),

or a community development investment under Regulation Y (12 CFR

225.25(b)(6));

(ii) Where the Comptroller of the Currency has determined, by order

or regulation, that an investment in that entity by a national bank is

a public welfare investment under section 5136 of the Revised Statutes

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

(iii) Where that entity is a community development financial

institution as defined in section 103(5) of the Community Development

Banking and Financial Institutions Act of 1994 (12 U.S.C. 4702(5)); or

(iv) Where that entity, directly or indirectly, engages solely in

or makes loans solely for the purposes of one or more of the following

community development activities:

(A) Investing in, developing, rehabilitating, managing, selling, or

renting residential property if a majority of the units will be

occupied by low- and moderate-income persons or if the property is a

``qualified low-income building'' as defined in section 42(c)(2) of the

Internal Revenue Code (26 U.S.C. 42(c)(2));

(B) Investing in, developing, rehabilitating, managing, selling, or

renting nonresidential real property or other assets located in a low-

or moderate-income area and targeted towards low- and moderate-income

persons;

(C) Investing in one or more small businesses located in a low- or

moderate-income area to stimulate economic development;

(D) Investing in, developing, or otherwise assisting job training

or placement facilities or programs that will be targeted towards low-

and moderate-income persons;

(E) Investing in an entity located in a low- or moderate-income

area if that entity creates long-term employment opportunities, a

majority of which (based on full time equivalent positions) will be

held by low- and moderate-income persons; and

(F) Providing technical assistance, credit counseling, research,

and program development assistance to low- and moderate-income persons,

small businesses, or nonprofit corporations to help achieve community

development;

(2) The investment is permitted by State law;

(3) The investment will not expose the State member bank to

liability beyond the amount of the investment;

(4) The investment does not exceed the sum of two percent of the

State member bank's capital stock and surplus as defined under 12 CFR

250.162;

(5) The aggregate of all such investments of the State member bank

does not exceed the sum of five percent of its capital stock and

surplus as defined under 12 CFR 250.162;

(6) The State member bank is well capitalized or adequately

capitalized under Secs. 208.33(b) (1) and (2);

(7) The State member bank received a composite CAMEL rating of

``1'' or ``2'' under the Uniform Financial Institutions Rating System

as of its most recent examination and an overall rating of at least

``satisfactory'' as of its most recent consumer compliance examination;

and

(8) The State member bank is not subject to any written agreement,

cease and desist order, capital directive, prompt corrective action

directive, or memorandum of understanding issued by the Board or a

Federal Reserve Bank.

(c) Notice. Not more than 30 days after making an investment under

paragraph (b) of this section, the State member bank shall advise its

Federal Reserve Bank of the investment, including the amount of the

investment and the identity of the entity in which the investment is

made.

(d) Investments requiring Board approval. (1) With prior Board

approval, a State member bank may make public welfare investments under

paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a),

other than those specified in paragraph (b) of this section.

(2) Requests for approval under this paragraph should include, at a

minimum, the amount of the proposed investment, a description of the

entity in which the investment is to be made, an explanation of why the

investment is a public welfare investment under paragraph 23 of section

9 of the Federal Reserve Act (12 U.S.C. 338a), a description of the

State member bank's potential liability under the proposed investment,

the amount of the State member bank's aggregate outstanding public

welfare investments under paragraph 23 of section 9 of the Federal

Reserve Act, and the amount of the State member bank's capital stock

and surplus as defined in 12 CFR 250.162.

(3) The Board will act on a request under this paragraph within 60

calendar days after receipt of a request that meets the requirements of

paragraph (d)(2) of this section, unless the Board notifies the

requesting State member bank that a longer time period will be

required.

(e) Divestiture of investments. A State member bank shall divest

itself of an investment made under paragraph (b), (d) or (f) of this

section to the extent that the investment exceeds the scope of, or

ceases to meet, the requirements of paragraphs (b)(1) through (b)(5),

or paragraph (d) of this section. The divestiture shall be made in the

manner specified in 12 CFR 225.140, Regulation Y, for interests

acquired by a lending subsidiary of a bank holding company or the bank

holding company itself in satisfaction of a debt previously contracted.

(f) Preexisting investments. (1) For ongoing investments made prior

to January 9, 1995 that are covered by paragraph (b) of this section, a

State member bank shall notify its Federal Reserve Bank of the

investment not more than sixty days after January 9, 1995.

(2) For other ongoing investments made prior to January 9, 1995, a

State member bank shall request Board approval not more than one year

after January 9, 1995.

By order of the Board of Governors of the Federal Reserve

System, December 2, 1994.

William W. Wiles,

Secretary of the Board.

[FR Doc. 94-30160 Filed 12-8-94; 8:45 am]

BILLING CODE 6210-01-P