Community Development Corporation and Project Investments and Other Public Welfare Investments

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 24

[Docket No. 96-21]

RIN 1557-AB46

Community Development Corporation and Project Investments and

Other Public Welfare Investments

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: As part of its Regulation Review Program, the Office of the

Comptroller of the Currency (OCC) is revising its regulation governing

national bank investments designed primarily to promote the public

welfare. This final rule clarifies banks' authority; renumbers and

reorganizes sections of the regulation; modifies the test for

determining whether investments primarily promote the public welfare;

and simplifies the regulation's investment self-certification and prior

approval processes. This final rule reduces regulatory burden and

inconsistencies while enhancing the ability of national banks to make

community development and other public welfare investments.

EFFECTIVE DATE: October 23, 1996.

FOR FURTHER INFORMATION CONTACT: Karen Bellesi, Acting Deputy Director,

Community Development Division, (202) 874-4940; or Michele Meyer,

Senior Attorney, Community and Consumer Law Division, (202) 874-5750,

Office of the Comptroller of the Currency, 250 E Street, SW,

Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

Background

The OCC has reviewed 12 CFR part 24 as part of its Regulation

Review Program (Program). Goals of the Program are eliminating

provisions that do not contribute significantly to maintaining the

safety and soundness of national banks or to accomplishing the OCC's

other statutory responsibilities, updating and modernizing the OCC's

rules where appropriate, and clarifying the OCC's regulations to convey

more effectively the standards the OCC seeks to apply. Consistent with

these goals, this final rule reduces regulatory burden on national

banks and clarifies the standards that the OCC applies to national

banks' community development and public welfare investment programs.

The Proposal

On December 28, 1995, the OCC published a notice of proposed

rulemaking (NPRM) (60 FR 67091) to revise 12 CFR part 24. Part 24

implements 12 U.S.C. 24(Eleventh), which authorizes national banks to

make investments ``designed primarily to promote the public welfare,

including the welfare of low- and moderate-income families and

communities (such as through the provision of housing, services, or

jobs),'' subject to certain percentage of capital limitations.

As initially written, part 24 placed predominant emphasis on

community development investments. Part 24 permitted national banks to

make investments in community development corporations (CDCs) and

community development projects (CD Projects), consistent with safe and

sound banking practices. Under part 24, banks could self-certify

certain community development investments. Investments that were not

eligible for self-

[[Page 49655]]

certification were subject to one of two prior approval processes. The

first required a bank to file an investment proposal, which the OCC

usually approved or disapproved within 30 days. The second consisted of

a five-day review period for investment proposals that the OCC had

previously approved for another bank.

In the NPRM, the OCC proposed replacing part 24's public welfare

test with modified criteria for determining whether an investment

promotes the public welfare, including a non-exhaustive list of

permissible public welfare activities. The NPRM also proposed

streamlining part 24's investment self-certification and prior approval

provisions. In addition, the NPRM removed redundant or otherwise

unnecessary provisions from the former rule and made several other

changes intended to improve the rule's clarity. Finally, the NPRM asked

for comment on whether the OCC should continue its policy of not using

part 24 authority as a basis for approving an investment that is

otherwise permissible under 12 U.S.C. 24(Seventh).

The Final Rule and Comments Received

The OCC received seven comments. Most commenters supported the

proposed changes. Comments were submitted by three national banks, one

savings bank, two trade groups, and one national non-profit

organization that provides support for local non-profit CDCs. As

discussed later in this preamble, several commenters supported the

proposal but suggested that the OCC make additional changes, and one

commenter opposed the proposed changes to the former rule's public

welfare test and self-certification provisions. The following

discussion summarizes these comments and the amendments to part 24.

Title

The NPRM proposed changing the title of part 24 from ``Community

Development Corporation and Project Investments'' to ``Community

Development Corporation and Project Investments and other Public

Welfare Investments.'' This change reflects the OCC's view that

national banks can promote the public welfare through a variety of

authorized investments, as described in Sec. 24.3, in addition to CDCs

and CD Projects. The OCC received no comments on this issue, and

accordingly adopts the proposed title change.

Authority, Purpose, and OMB Control Number (Sec. 24.1)

The NPRM proposed amending the ``purpose'' paragraph of the

regulation to reflect that CDCs and CD Projects that develop affordable

housing, foster revitalization and stabilization of low-and moderate-

income areas, or provide equity or debt financing for small businesses

are just some of the types of investments that a national bank can make

under part 24. The preamble to the NPRM emphasized that the OCC

continues to encourage national banks to make these types of

investments but also stressed that banks may undertake other kinds of

public welfare investments. The OCC received no comments specifically

on this proposed section. However, as discussed later in this preamble,

the OCC received comments on proposed Sec. 24.3 that resulted in

modifications to that section to provide that banks' part 24

investments benefit low- and moderate-income individuals, low- and

moderate-income areas, or other areas targeted for redevelopment by

local, state, tribal or Federal government. Consistent with the change

to Sec. 24.3, the OCC adopts proposed Sec. 24.1 with a modification to

the ``purpose'' paragraph to clarify that bank efforts to promote the

public welfare through small business investment or area revitalization

or stabilization must be targeted to low- and moderate-income areas or

other redevelopment areas.

Definitions (Sec. 24.2)

In keeping with the Regulation Review Program's goal of using

terminology consistently throughout the OCC's regulations, the NPRM

proposed the use of definitions and terms common to other OCC

regulations. For example, the definition of ``low-income and moderate-

income'' in the NPRM referred to the OCC's CRA Regulation (12 CFR part

25). One commenter supported the OCC's efforts to standardize various

definitions in its regulations, but voiced the concern that the CRA

definition of ``low-income and moderate-income'' was more restrictive

than the definition in the former part 24.

Under the former rule and the OCC's CRA regulation, low- and

moderate-income individuals are individuals whose incomes are less than

80 percent of the median income of the area in which they live. The

former rule defined low- and moderate-income areas slightly differently

from the OCC's CRA regulation, however. The former rule defined low-

and moderate-income areas as areas where at least 51 percent of the

residents are low- and moderate-income persons and families. The CRA

regulation defines low- and moderate-income areas as areas where at

least 50 percent of the families have incomes less than 80 percent of

the area median family income. 12 CFR 25.12. Thus, the CRA regulation

is slightly more expansive in its definition of low- and moderate-

income areas than the former rule. The OCC believes that the difference

between the two definitions is insignificant and that adopting the CRA

regulation definition of low-and moderate-income in this final rule

will enhance its clarity and reduce the burden associated with having

different definitions of the same terms in the OCC's regulations.

Accordingly, the OCC adopts the proposed definition of ``low-income and

moderate-income.''

The NPRM also proposed using the same definition of ``capital and

surplus'' as the OCC's Lending Limit Regulation, 12 CFR part 32, which

refers to components of capital that national banks calculate for

purposes of determining their risk-based capital under 12 CFR part 3.

The OCC received no comments on this section and, accordingly, adopts

the proposed definition of ``capital and surplus.''

The NPRM omitted the former rule's definitions of community

development limited partnership and community-based development

corporation as unnecessary further examples of vehicles that national

banks may use to make investments under this part. The OCC received no

comments on this proposed removal, and accordingly adopts the proposed

change. This change does not affect a national bank's authority to

invest in a community development limited partnership or community

based development corporation. Consistent with the requirements of this

part, a national bank may continue to invest in these and other

vehicles.

The NPRM proposed adding a definition of ``eligible bank'' that is

the same as the ``eligible bank'' definition proposed by the OCC for

corporate applications in its November 29, 1994 notice of proposed

rulemaking concerning 12 CFR part 5 (59 FR 61034). The NPRM proposed

allowing a bank to self-certify investments for purposes of part 24 if

it has a composite rating of 1 or 2 under the Uniform Financial

Institutions Rating System, has at least a satisfactory CRA rating, is

well capitalized, and is not subject to any current OCC enforcement

actions. One commenter suggested that the final rule limit self-

certification eligibility to only banks with outstanding CRA ratings.

The OCC declines to make this change for two reasons. First, part 24

[[Page 49656]]

investments represent an important mechanism for banks to improve their

CRA records. Second, limiting self-certification to banks with

outstanding CRA ratings would result in far fewer banks benefiting from

the streamlined self-certification processes proposed in the NPRM. The

OCC accordingly adopts the proposed definition of ``eligible bank''

with only a technical clarification that the definition applies to the

self-certification process.

The NPRM also clarified that a national bank that is at least

adequately capitalized and that has a composite rating of at least 3

with improving trends may submit a letter to the OCC's Community

Development Division requesting permission to self-certify investments.

The OCC received no comments on this clarification. Accordingly, the

final rule permits a national bank that is at least adequately

capitalized and that has a composite rating of at least 3 with

improving trends to submit a letter to the OCC's Community Development

Division requesting permission to self-certify investments.

In addition, in a change from the former rule, the NPRM proposed

permitting a bank that is subject to a current OCC enforcement action

to seek permission to self-certify investments. As explained in the

preamble to the NPRM, the OCC believes this modification is appropriate

in light of the final rule's expanded self-certification opportunities

for banks (See Sec. 24.6.) Accordingly, the final rule adopts this

change.

In addition, the NPRM proposed changing the definition of

``significant risk to the deposit insurance fund'' to include risk to

all Federal deposit insurance funds. The OCC received no comments on

this proposed section and, accordingly, adopts the proposed change.

Finally, the NPRM proposed making two changes concerning the small

business definitions in former part 24. First, the NPRM proposed

removing the definition of ``minority-owned small businesses'' because

these businesses are encompassed by the regulation's provisions

concerning all small businesses. Second, the NPRM proposed updating the

citation to the Small Business Administration regulations referenced in

the definition of ``small businesses'' in the former regulation. The

OCC received no comments on these proposed changes and, accordingly,

adopts them with the clarification that the definition of ``small

business'' includes minority-owned small business.

Public Welfare Investments (Sec. 24.3)

Former part 24 delineated a public welfare test that consisted of

four requirements. Under former Sec. 24.4, an investment in a CDC or CD

Project was designed primarily to promote the public welfare only if:

(1) the investment primarily benefited low- and moderate-income persons

and families or small businesses; (2) the investment addressed

community development needs not met by the private market in one or

more communities served by the bank; (3) there was nonbank community

involvement in the CDC or CD Project; and (4) the profits and

distributions from a CDC or CD Project were reinvested in activities

that primarily promote the public welfare.1

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1 On December 28, 1995, the OCC published a final rule

eliminating part 24's reinvestment requirement. 60 FR 67049.

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Based on the OCC's experience since it adopted part 24, the NPRM

proposed replacing the public welfare test with modified criteria for

determining whether an investment primarily promotes the public

welfare. That list retained the first element of the public welfare

test, the requirement for a primary benefit to low- and moderate-income

individuals or small businesses, but made clear that this benefit could

be provided in a variety of ways. For example, Sec. 24.3(a) of the NPRM

permitted banks to invest in affordable housing, community

revitalization projects, small business financing or ``other

activities, services, or facilities conducive to the public welfare.'

The list of public welfare investment criteria also modified the

private market financing and community involvement elements of the

current public welfare test. Proposed Sec. 24.3(b) required a bank to

demonstrate only that it was difficult, rather than impossible, to

obtain private market financing. Section 24.3(c) of the proposal also

required a bank to demonstrate community support for or participation

in a proposed investment, but, unlike the former rule, it did not

prescribe any particular method of demonstrating that support or

participation.2

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\2\ The former rule required a bank to demonstrate nonbank

community involvement in a CDC or CD project by indicating support

from the affected primary beneficiaries and representatives of local

government. In the case of a CD entity with a board of directors, a

bank was required to demonstrate such support by the composition of

the organization's board of directors.

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In addition, Sec. 24.3(d) of the NPRM permitted a bank to make an

investment that also benefitted an area outside those where the bank

provides its core banking services. However, the bank would still have

been required to demonstrate the extent to which its investment

benefits the communities where it provides these services. These

proposed revisions to the public welfare test reflected the OCC's

willingness to consider a wider range of public welfare investments

than under the former rule.

All but one of the commenters voiced strong support for the

proposed revisions to the public welfare test. The objecting commenter,

a national non-profit organization that provides support for local non-

profit CDCs, strongly supported the former rule and expressed concern

that the proposal undermines the intent of 12 U.S.C. 24(Eleventh),

because the revised criteria would discourage banks from taking on

difficult community development projects, such as those targeted to

low- and moderate-income areas where private market financing is

difficult to obtain. The OCC appreciates these concerns and has

modified Sec. 24.3 to clarify that investments must benefit low- and

moderate-income individuals, low- and moderate-income areas, or other

areas targeted for redevelopment by local, state, tribal or Federal

government. The OCC has also modified Sec. 24.3 to require that a bank

demonstrate that it is not reasonably practicable to obtain other

private market financing for a proposed investment. In addition, the

OCC agrees with the commenter's opinion that the phrase ``conducive to

the public welfare'' in proposed Sec. 24.3(a)(4) could be

misinterpreted by some readers as a lowering of the statutory

requirement that banks' investments must ``primarily promote the public

welfare.'' Accordingly, the OCC has revised Sec. 24.3(a)(4) to clarify

that all investments under this part must primarily promote the public

welfare.

Two commenters, although supportive of the proposed changes to the

community participation requirement, requested that the final rule

include a list of examples for demonstrating community support for, or

participation in, a proposed investment. Based on these comments, the

OCC has revised the community participation criterion to include the

following examples:

In the case of an investment in a CD entity with a board

of directors, representation on the board of directors by non-bank

community representatives with expertise relevant to the proposed

investment;

Establishment of an advisory board for the bank's

community development activities that includes non-bank community

representatives with expertise relevant to the proposed investment;

[[Page 49657]]

Formation of a formal business relationship with a

community-based organization in connection with the proposed

investment;

Contractual agreements with community partners to provide

services in connection with the proposed investment;

Joint ventures with local small businesses in the proposed

investment; and

Financing for the proposed investment from the public

sector or community development organizations.

The OCC emphasizes, however, that these examples are by no means

exhaustive; banks and their community partners may determine other

acceptable ways to demonstrate community support for, or participation

in, investments under this part.

To improve clarity, the final rule reverses the order of the

sections concerning community participation and benefit to communities

otherwise served by the bank. Thus, the community participation section

is now set forth at Sec. 24.3(d) of the final rule, and the section

concerning benefit to communities otherwise served by the bank is set

forth at Sec. 24.3(c).

Finally, the NPRM proposed removing as unnecessary former

Sec. 24.4(e), which provided that a bank must manage its CDC and CD

Project investments in a prudent manner. The OCC received no comments

on the proposed removal and, accordingly, adopts the proposed change.

This change streamlines the regulation and, of course, reflects no

change in the applicable standard that national banks must manage their

part 24 investments--as with all their investments--consistent with

safe and sound banking practices.

Investment Limits (Sec. 24.4)

The former rule contained investment limit provisions at

Sec. 24.4(b) and (d). For ease of reference, the NPRM grouped the

provisions concerning part 24 investment limits into a separately

titled section. Section 24.4(a) of the NPRM clarified that, as provided

in 12 U.S.C. 24(Eleventh), a bank's aggregate outstanding investments

under part 24 may not exceed 5 percent of its capital and surplus

unless the bank is at least adequately capitalized and the OCC

determines, by written approval of a proposed investment, that a higher

amount, up to 10 percent, will pose no significant risk to the deposit

insurance fund.

One commenter suggested that the final rule permit an adequately

capitalized bank with assets up to $150 million to commit up to ten

percent of its capital and surplus to part 24 investments. As explained

earlier, however, the statute requires a bank to seek OCC approval of

investments that exceed 5 percent of capital. Accordingly, the OCC

adopts the statutory limitation proposed in the NPRM.

Public Welfare Investment Self-Certification and Prior Approval

Procedures (Sec. 24.5)

The NPRM proposed changes to the self-certification and prior

approval procedures set forth in Sec. 24.11 of the former rule. Former

Sec. 24.11 provided three processes for approval of authorized

investments. The first required a bank to file an investment proposal,

which the OCC usually approved or disapproved within 30 days. The

second process consisted of a five-day review period by the OCC for

investment proposals that the OCC had previously approved for another

bank. The third was a self-certification process for certain

investments, under which a bank filed a notice with the OCC within 10

days after it makes an investment, and the OCC sent a confirmation of

receipt within five days.

The NPRM proposed eliminating the second approval process. Thus,

under Sec. 24.5(a) and Sec. 24.6(a) of the NPRM, a bank would be

permitted to self-certify an investment previously approved by the OCC

for another bank. The preamble to the NPRM further provided that the

OCC will continue its practice of sending a simple confirmation of

receipt of a bank's self-certification notice within five days. The

NPRM also made clear that the OCC will not retroactively review a self-

certified investment proposal, but simply will review the self-

certification documents to ensure that they meet the self-certification

requirements set forth in Sec. 24.5(a). The OCC received no comments on

the proposed elimination of the approval process for investments

previously approved by the OCC for another bank and, accordingly,

adopts this change.

Section 24.5(b) of the NPRM sets forth the prior approval

procedures for investment proposals that do not qualify for self-

certification.3 In considering a bank's investment proposal under

the NPRM, the OCC will consider whether the investment satisfies the

requirements of Sec. 24.3 and whether it is consistent with the bank's

safe and sound operation and the OCC's policies. As explained in the

NPRM's preamble, the OCC will continue its practice of sending a simple

confirmation of receipt of an investment proposal within five days.

Consistent with the former rule, the NPRM permitted a bank, unless

notified otherwise by the OCC, to make a proposed investment 30

calendar days after the date on which the OCC received the bank's

investment proposal. The NPRM further provided that the OCC may notify

the bank that it is extending the review period. If so notified, the

bank could make the investment only with the OCC's written approval.

One commenter suggested that the final rule require that, within 30

days of the OCC's receipt of a bank's investment proposal, the OCC

notify the bank of the proposal's status by facsimile or telephone. The

OCC declines to include this level of detail in the final rule but will

endeavor to notify banks of proposal status as quickly as possible.

Accordingly, the OCC adopts the proposed procedures for prior approval

of investment proposals.

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3 The NPRM proposed removing the former rule's provision

for optional review as unnecessary. The OCC received no comments on

this proposed removal, and accordingly adopts the proposed change. A

national bank may, however, continue to request prior OCC review and

approval of any investment proposal, including one that qualifies

for self-certification.

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Former rule Sec. 24.11(b) contained a limit on the size of

investments eligible for self-certification by banks with more than

$250 million in assets. Those banks were required to seek prior OCC

approval for investments that exceeded the lesser of 2 percent of their

unimpaired capital and surplus or $10 million. The NPRM proposed

removing this additional limitation in light of the proposed new

standards that define the banks eligible to use the self-certification

process (discussed earlier). The OCC received no comments on this

proposed removal and, accordingly, the final rule adopts the proposed

change.

Investments Eligible for Self-Certification (Sec. 24.6)

Section 24.6 of the NPRM proposed replacing former rule Sec. 24.13,

which limited self-certification to investments using certain

structures as well as certain activities. These structures included

multi-bank CDCs; CDCs established by state or local government;

community-based organizations; and certain community development

limited partnerships. A CDC subsidiary was not an eligible structure

for self-certification.

The OCC believes that a structure-based self-certification

limitation is no longer necessary. This limitation was intended to

allow the OCC to ensure that particular investments did not expose

banks to safety and soundness risks or unlimited liability,

particularly relating to then-novel structures, such as limited

liability companies and CD

[[Page 49658]]

banks. However, since self-certification is limited to eligible banks

(as defined in Sec. 24.2(e) of the final rule), the OCC believes it is

reasonable to rely on bank management to determine the appropriate

structures for part 24 investments. The OCC received no comments on the

proposed elimination of the list of eligible structures and,

accordingly, adopts the proposed change.

In addition to eliminating the list of eligible structures,

Sec. 24.6(a) of the NPRM proposed an expanded list of activities

eligible for self-certification to reflect the industry's innovation in

part 24 investing and the OCC's experience with self-certification

under part 24. Part 24's self-certification provisions encourage

community development and other public welfare investments by banks by

reducing the regulatory steps associated with making the investments.

In order to maximize the use of self-certification as an incentive for

banks to make investments that primarily promote the public welfare,

and to encourage banks' creativity in making these investments, the OCC

identified in proposed Sec. 24.6(a) a clear and expanded list of

eligible activities. In addition to the former rule's list of eligible

activities, the NPRM's list included, but was not limited to, certain

investments that benefit low- and moderate-income persons and small

businesses, investments that previously have been determined by the OCC

to be permissible under part 24, and investments previously approved by

the Federal Reserve Board (FRB) under 12 CFR 208.21 for state member

banks.

One commenter suggested several changes to the proposed list of

activities eligible for self-certification. The commenter recommended

deleting from the list investments in an entity that acquires housing

for low- and moderate-income persons. The OCC believes, however, that

this activity, which was eligible for self-certification under the

former rule, promotes the public welfare and that permitting self-

certification of such investments is therefore consistent with the

statute and accordingly declines to remove it from the proposed list.

The commenter also requested that the list clarify that a bank may

self-certify investments as a limited partner, or as a partner in an

entity that it itself a limited partner, in a project with a general

partner that is, or is primarily owned and operated by, a 26 U.S.C.

501(c) (3) or (4) non-profit corporation and that qualifies for the

Federal low-income housing tax credit. The OCC agrees with this

suggestion and accordingly adopts the proposed clarification.

In addition, the commenter suggested that the final rule bar from

self-certification any bank that self-certifies an investment the OCC

later determines was ineligible for self-certification. The OCC

believes that this concern is addressed by the remedial action

provisions of proposed Sec. 24.7(c). Finally, the commenter objected to

the proposed inclusion of investments of a type approved by the FRB in

the list of eligible activities. The OCC believes that national banks

and the beneficiaries of their investments will benefit by the

increased flexibility and reduced burden associated with this

provision, but agrees that no investment can be self-certified, even if

that type of investment has been approved by the FRB, unless it meets

the criteria for public welfare investments set forth in Sec. 24.3.

Accordingly, this provision has been modified in the final rule.

As discussed earlier, the OCC has modified Sec. 24.3 to require

that bank investments be targeted to low- and moderate-income

individuals, low- and moderate-income areas, or other areas targeted

for redevelopment. The OCC has decided, however, to modify the list of

activities eligible for self-certification proposed in Sec. 24.6(a) of

the NPRM to clarify that a bank may self-certify an investment only if

it primarily benefits low- and moderate-income individuals or areas.

National banks must therefore submit for prior approval by the OCC

proposals for other types of investments. The distinction between what

is a permissible investment under Sec. 24.3 and what is eligible for

self-certification under Sec. 24.6 reflects the OCC's view that

investments targeted to low- and moderate-income individuals or areas

necessarily primarily promote the public welfare. Other types of

investments may primarily promote the public welfare also, but the OCC

believes that some prior review of such investments is an appropriate

means to ensure that they satisfy the criteria set forth in Sec. 24.3.

Accordingly, the OCC adopts the list of eligible activities proposed in

Sec. 24.6(a) of the NPRM with two modifications. The first modification

limits self-certification to investments that benefit low- and

moderate-income individuals or areas; and the second modification

reflects the commenter's suggestion concerning limited partnerships

investments.4

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4 In response to another commenter, the OCC clarifies that

permissible investments in a rural community in which a bank has its

main office or branch may be self-certified.

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Notwithstanding the activities eligible for self-certification

listed in Sec. 24.6(a), Sec. 24.6(b) of the NPRM provided that a bank

may not self-certify investments that involve properties carried on the

bank's books as ``other real estate owned'' (OREO properties) or that

fund projects outside the states or metropolitan areas in which the

bank's main office or branches are located. The latter limitation is

similar to the limit on self-certification that appears in former part

24 but was revised in the NPRM to reflect that some national banks now

have branches in more than one state. One commenter suggested that the

final rule permit self-certification of investments in portfolio

projects, such as regional funds that invest in affordable housing

projects located in several states, where no more than 25 percent of

the affordable housing projects are located outside the states or

metropolitan areas served by the bank. The OCC agrees that a bank

should not be discouraged from investing in innovative projects that

primarily benefit the communities it serves because a small portion of

the investment benefits other areas. Accordingly, under the final rule,

a bank may not self-certify an investment where more than 25 percent of

the investment funds projects in a state or metropolitan area other

than the states or metropolitan areas in which the bank maintains its

main office or branches. If a portion of a bank's investment funds

projects in areas outside of those in which the bank maintains its main

office or branches, the bank must certify under Sec. 24.5(a)(3)(vii)

that no more than 25 percent of the investment funds projects in a

state or metropolitan area other than the states or metropolitan areas

in which the bank maintains its main office or branches.

Examination, Records, and Remedial Action (Sec. 24.7)

The NPRM proposed replacing former Sec. 24.21, which set forth the

former rule's examination, records, and remedial action provisions,

with proposed Sec. 24.7 without substantive change. The OCC received no

comments on this proposed revision, and accordingly adopts the proposed

change.

Accounting for Public Welfare Investments (Current Sec. 24.4(c))

Section 24.4(c) of the former rule provided that a bank's

investments in CDCs and CD Projects generally could be recorded as

``other assets at cost.'' The former rule also set forth circumstances

under which a bank would be required to consolidate its investments on

a line-by-line basis or account for them under the equity method of

accounting. The NPRM proposed eliminating this section as

[[Page 49659]]

unnecessary, because banks generally look to other sources for their

accounting instructions. The OCC received no comments on this proposed

removal, and accordingly adopts the proposed change. Banks should

record their investments, as appropriate, pursuant to the instructions

for Consolidated Reports of Condition and Income published by the

Federal Financial Institutions Examination Council.

Policy Issue Regarding Dual Sources of Authority

In the past, the OCC has not used 12 U.S.C. 24(Eleventh), as

implemented by part 24, to approve activities permissible under other

provisions of the National Bank Act, 12 U.S.C. 1 et seq. This position

was intended to prevent banks' activities from being subjected

unnecessarily to part 24's limitation on the amount of capital a bank

may commit to community development and public welfare investments. For

example, a bank could make certain affordable housing loans under both

12 U.S.C. 24(Seventh) and 24(Eleventh). If the bank made such a loan

under the authority of 24(Eleventh), the loan would be subject to a

capital limitation that is stricter than the generally applicable

lending limits. Because the bank would have used unnecessarily some of

its limited part 24 authority to make a loan that is also permissible

under 24(Seventh), the bank would be left with less capital to commit

to investments that are permissible only under part 24. Therefore, the

OCC would usually conclude that 24(Seventh) provided the authority for

the loan. This position, however, does not reflect the OCC's general

approach of allowing banks to decide how best to structure their

investments.

The NPRM requested comment on whether the OCC should continue its

policy of not using part 24 as a basis for approving activities

otherwise permissible under the National Bank Act. One commenter opined

that part 24 provides limited authority that should be restricted only

to those activities motivated by concern for the public welfare, rather

than regular business considerations. The OCC believes that part 24

affords banks the opportunity to implement activities that supplement

and enhance otherwise permissible activities but may, in some cases,

provide authority that overlaps with other authority under the National

Bank Act. The OCC has decided that, where a choice is available, a bank

will be permitted to choose whether an investment activity will be

undertaken pursuant to authority under 24(Seventh) or 24(Eleventh).

When a bank seeks to rely on 24(Eleventh), however, the OCC will advise

the bank that the proposed investment is permissible under both

authorities to ensure that the bank is aware of the full range of its

legal investment opportunities and of the effect of the applicable

investment limitations.

Derivation Table

This table directs readers to the provision(s) of the current

regulation, if any, upon which the proposed provision is based.

----------------------------------------------------------------------------------------------------------------

Revised section Original section Comments

----------------------------------------------------------------------------------------------------------------

Sec. 24.1....................... Sec. 24.1................................... Modified.

Sec. 24.2(a).................... Sec. 24.2(a)................................ Modified.

(b).......................... Sec. 24.2(m)................................ Substantial change.

(c).......................... Sec. 24.2(b)................................ Modified.

(d).......................... Sec. 24.2(e)................................ Modified.

(e).......................... ............................................. Added.

(f).......................... Sec. 24.2 (g) ,(h).......................... Substantial change.

(g).......................... Sec. 24.2(k)................................ Modified.

(h).......................... Sec. 24.2(l)................................ Modified.

Sec. 24.2(c)................................ Removed.

Sec. 24.2(d)................................ Removed.

Sec. 24.2(f)................................ Removed.

Sec. 24.2(i)................................ Removed.

(i).......................... Sec. 24.2(a)................................ Modified.

Sec. 24.2(j)................................ Removed.

Sec. 24.3....................... Sec. 24.4(a)................................ Substantial change.

Sec. 24.4....................... Sec. 24.4 (b), (d).......................... Modified.

Sec. 24.4(c)................................ Removed.

Sec. 24.4(e)................................ Removed.

Sec. 24.5(a).................... Sec. 24.11(a)............................... Substantial change.

(b).......................... Sec. 24.11 (b), (d), (e).................... Substantial change.

Sec. 24.11(c)............................... Removed.

Sec. 24.6(a).................... Sec. 24.13(b)............................... Substantial change.

(b).......................... Sec. 24.11(b)............................... Modified.

Sec. 24.13(a)............................... Removed.

Sec. 24.7....................... Sec. 24.21.................................. Modified.

----------------------------------------------------------------------------------------------------------------

Regulatory Flexibility Act

It is hereby certified that this final rule will not have a

significant economic impact on a substantial number of small entities.

Accordingly, a regulatory flexibility analysis is not required. This

final rule will reduce the regulatory burden on national banks,

regardless of size, by replacing part 24's public welfare test with

modified criteria for determining whether an investment promotes the

public welfare, streamlining the self-certification and prior approval

sections of the rule, and eliminating unnecessary provisions. Although

beneficial, these changes will not have a material impact on affected

banks.

Executive Order 12866

The OCC has determined that this final rule is not a significant

regulatory action under Executive Order 12866.

[[Page 49660]]

Unfunded Mandates

The OCC has determined that this final rule will not result in

expenditures by state, local and tribal governments, or by the private

sector, of more than $100 million in any one year. Accordingly, a

budgetary impact statement is not required under section 202 of the

Unfunded Mandates Reform Act of 1995.

Paperwork Reduction Act of 1995

The collection of information requirements in this final rule are

found in 12 CFR 24.5. This information is required for the public

welfare investment self-certification and prior approval procedures.

The likely respondents are national banks.

Estimated average annual burden hours per respondent: 1.05 hours.

Estimated number of respondents: 400.

Estimated total annual reporting burden: 418 hours.

Start-up costs to respondents: None.

List of Subjects in 12 CFR Part 24

Community development, Credit, Investments, National banks,

Reporting and recordkeeping requirements.

Authority and Issuance

For the reasons set forth in the preamble, the OCC amends title 12,

chapter I, part 24, of the Code of Federal Regulations as set forth

below.

PART 24--COMMUNITY DEVELOPMENT CORPORATIONS, COMMUNITY DEVELOPMENT

PROJECTS, AND OTHER PUBLIC WELFARE INVESTMENTS

Sec.

24.1 Authority, purpose, and OMB control number.

24.2 Definitions.

24.3 Public welfare investments.

24.4 Investment limits.

24.5 Public welfare investment self-certification and prior

approval procedures.

24.6 Activities eligible for self-certification.

24.7 Examination, records, and remedial action.

Authority: 12 U.S.C. 24(Eleventh), 93a, 481 and 1818.

Sec. 24.1 Authority, purpose, and OMB control number.

(a) Authority: The Office of the Comptroller of the Currency (OCC)

issues this part pursuant to its authority under 12 U.S.C.

24(Eleventh), 93a, and 481.

(b) Purpose. This part implements 12 U.S.C. 24(Eleventh), which

authorizes national banks to make investments designed primarily to

promote the public welfare, including the welfare of low- and moderate-

income areas or individuals, such as by providing housing, services, or

jobs. It is the OCC's policy to encourage national banks to make

investments described in Sec. 24.3, consistent with safety and

soundness. The OCC believes that national banks can promote the public

welfare through a variety of investments, including those in community

development corporations (CDCs) and community development projects (CD

Projects) that develop affordable housing, foster revitalization or

stabilization of low- and moderate-income areas or other areas targeted

for redevelopment by local, state, tribal or Federal government, or

provide equity or debt financing for small businesses that are located

in such areas or that produce or retain permanent jobs for low- and

moderate-income persons. This part provides:

(1) The standards that the OCC uses to determine whether an

investment is designed primarily to promote the public welfare; and

(2) The procedures that apply to these investments.

(c) OMB control number. The collection of information requirements

contained in this part were approved by the Office of Management and

Budget under OMB control number 1557-0194.

Sec. 24.2 Definitions.

For purposes of this part, the following definitions apply:

(a) Adequately capitalized has the same meaning as adequately

capitalized in 12 CFR 6.4.

(b) Capital and surplus means:

(1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's

risk-based capital standards set out in Appendix A to 12 CFR part 3 as

reported in the bank's Consolidated Report of Condition and Income as

filed under 12 U.S.C. 161; plus

(2) The balance of a bank's allowance for loan and lease losses not

included in the bank's Tier 2 capital, for purposes of the calculation

of risk-based capital under Appendix A to 12 CFR part 3, as reported in

the bank's Consolidated Report of Condition and Income as filed under

12 U.S.C. 161.

(c) Community development corporation (CDC) means a corporation

established by one or more insured financial institutions, or by

insured financial institutions and other investors, to make one or more

investments that meet the requirements of Sec. 24.3.

(d) Community development Project (CD Project) means a project to

make an investment that meets the requirements of Sec. 24.3.

(e) Eligible bank means, for purposes of Sec. 24.5, a national bank

that:

(1) Is well capitalized;

(2) Has a composite rating of 1 or 2 under the Uniform Financial

Institutions Rating System;

(3) Has a Community Reinvestment Act (CRA) rating of

``Outstanding'' or ``Satisfactory''; and

(4) Is not subject to a cease and desist order, consent order,

formal written agreement, or Prompt Corrective Action directive (see 12

CFR part 6, subpart B) or, if subject to any such order, agreement or

directive, is informed in writing by the OCC that the bank may be

treated as an ``eligible bank'' for purposes of this part.

(f) Low-income and moderate-income have the same meanings as ``low-

income'' and ``moderate-income'' in 12 CFR 25.12(n).

(g) Significant risk to the deposit insurance fund means a

substantial probability that any Federal deposit insurance fund could

suffer a loss.

(h) Small business means a business, including a minority-owned

small business, that meets the qualifications for Small Business

Administration Development Company or Small Business Investment Company

loan programs in 13 CFR 121.301.

(i) Well capitalized has the same meaning as well capitalized in 12

CFR 6.4.

Sec. 24.3 Public welfare investments.

A national bank may make an investment under this part if:

(a) The investment primarily benefits low- and moderate-income

individuals, low- and moderate-income areas, or other areas targeted

for redevelopment by local, state, tribal or Federal government

(including Federal enterprise communities and Federal empowerment

zones) by providing or supporting one or more of the following

activities:

(1) Affordable housing, community services, or permanent jobs for

low- and moderate-income individuals;

(2) Equity or debt financing for small businesses;

(3) Area revitalization or stabilization; or

(4) Other activities, services, or facilities that primarily

promote the public welfare;

(b) The bank demonstrates that it is not reasonably practicable to

obtain other private market financing for the proposed investment;

(c) The bank demonstrates the extent to which the investment

benefits communities otherwise served by the bank; and

(d) The bank demonstrates non-bank community support for or

participation

[[Page 49661]]

in the investment. Community support or participation may be

demonstrated in a variety of ways, including but not limited to:

(1) In the case of an investment in a CD entity with a board of

directors, representation on the board of directors by non-bank

community representatives with expertise relevant to the proposed

investment;

(2) Establishment of an advisory board for the bank's community

development activities that includes non-bank community representatives

with expertise relevant to the proposed investment;

(3) Formation of a formal business relationship with a community-

based organization in connection with the proposed investment;

(4) Contractual agreements with community partners to provide

services in connection with the proposed investment;

(5) Joint ventures with local small businesses in the proposed

investment; and

(6) Financing for the proposed investment from the public sector or

community development organizations.

Sec. 24.4 Investment limits.

(a) Limit on aggregate outstanding investments. A national bank's

aggregate outstanding investments under this part may not exceed 5

percent of its capital and surplus, unless the bank is at least

adequately capitalized and the OCC determines, by written approval of

the bank's proposed investment(s), that a higher amount will pose no

significant risk to the deposit insurance fund. In no case may a bank's

aggregate outstanding investments under this part exceed 10 percent of

its capital and surplus.

(b) Limited liability. A national bank may not make an investment

under this part that would expose the bank to unlimited liability.

Sec. 24.5 Public welfare investment self-certification and prior

approval procedures.

(a) Self-certification of public welfare investments. (1) Subject

to Sec. 24.4(a), an eligible bank may make an investment described in

Sec. 24.6(a) without prior notification to, or approval by, the OCC if

the bank follows the self-certification procedures prescribed in this

section.

(2) To self-certify an investment, an eligible bank shall submit,

within 10 working days after it makes an investment, a letter of self-

certification to the Director, Community Development Division, Office

of the Comptroller of the Currency, Washington, DC 20219.

(3) The bank's letter of self-certification must include:

(i) The name of the CDC, CD Project, or other entity in which the

bank has invested;

(ii) The date the investment was made;

(iii) The type of investment (equity or debt), the investment

activity listed in Sec. 24.6(a) that the investment supports, and a

brief description of the particular investment;

(iv) The amount of the bank's total investment in the CDC, CD

Project or other entity, and the bank's aggregate outstanding

investments under this part, including commitments and the investment

being self-certified;

(v) The percentage of the bank's capital and surplus represented by

the bank's aggregate outstanding investments under this part, including

commitments and the investment being self-certified;

(vi) A statement certifying compliance with the requirements of

Sec. 24.3 and Sec. 24.4; and

(vii) If a portion of the investment funds projects outside of the

areas in which the bank maintains its main office or branches, a

statement certifying that no more than 25 percent of the investment

funds projects in a state or metropolitan area other than the states or

metropolitan areas in which the bank maintains its main office or

branches.

(4) A national bank that is not an eligible bank but that is at

least adequately capitalized, and has a composite rating of at least 3

with improving trends under the Uniform Financial Institutions Rating

System, may submit a letter to the Community Development Division

requesting authority to self-certify investments. The Community

Development Division considers these requests on a case-by-case basis.

(b) Investments requiring prior approval. (1) If a national bank or

its proposed investment does not meet the requirements for self-

certification set forth in paragraph (a) of this section, the bank

shall submit a proposal for an investment to the Director, Community

Development Division, Office of the Comptroller of the Currency,

Washington, DC 20219.

(2) The bank's investment proposal must include:

(i) The name of the CDC, CD Project, or other entity in which the

bank intends to invest;

(ii) The date on which the bank intends to make the investment;

(iii) The type of investment (equity or debt), the investment

activity listed in Sec. 24.3(a) that the investment supports, and a

description of the particular investment;

(iv) The amount of the bank's total investment in the CDC, CD

Project or other entity, and the bank's aggregate outstanding

investments under this part (including commitments and the investment

being proposed);

(v) The percentage of the bank's capital and surplus represented by

the bank's aggregate outstanding investments under this part (including

commitments and the investment being proposed); and

(vi) A statement certifying compliance with the requirements of

Sec. 24.3 and Sec. 24.4.

(3) In reviewing a proposal, the OCC considers the following

factors and other available information:

(i) Whether the investment satisfies the requirements of Sec. 24.3

and Sec. 24.4;

(ii) Whether the investment is consistent with the safe and sound

operation of the bank; and

(iii) Whether the investment is consistent with the requirements of

this part and the OCC's policies.

(4) Unless otherwise notified in writing by the OCC, and subject to

Sec. 24.4(a), the proposed investment is deemed approved after 30

calendar days from the date on which the OCC receives the bank's

investment proposal.

(5) The OCC, by notifying the bank, may extend its period for

reviewing the investment proposal. If so notified, the bank may make

the investment only with the OCC's written approval.

(6) The OCC may impose one or more conditions in connection with

its approval of an investment under this part. All approvals are

subject to the condition that a national bank must conduct the approved

activity in a manner consistent with any published guidance issued by

the OCC regarding the activity.

Sec. 24.6 Activities eligible for self-certification.

(a) Eligible activities. In accordance with the process described

in Sec. 24.5(a), a bank may self-certify the following investments

without prior notice to, or approval by, the OCC:

(1) Investments in an entity that finances, acquires, develops,

rehabilitates, manages, sells, or rents housing primarily for low- and

moderate-income individuals;

(2) Investments that finance small businesses (including equity or

debt financing and investments in an entity that provides loan

guarantees) that are located in low- and moderate-income areas or that

produce or retain permanent jobs, the majority of which are held by

low- and moderate-income individuals;

(3) Investments that provide credit counseling, job training,

community

[[Page 49662]]

development research, and similar technical assistance services for

non-profit community development organizations, low- and moderate-

income individuals or areas, or small businesses located in low- and

moderate-income areas or that produce or retain permanent jobs, the

majority of which are held by low- and moderate-income individuals;

(4) Investments in an entity that acquires, develops,

rehabilitates, manages, sells, or rents commercial or industrial

property that is located in a low- and moderate-income area and

occupied primarily by small businesses, or that is occupied primarily

by small businesses that produce or retain permanent jobs, the majority

of which are held by low- and moderate-income individuals;

(5) Investments as a limited partner, or as a partner in an entity

that is itself a limited partner, in a project with a general partner

that is, or is primarily owned and operated by, a 26 U.S.C. 501(c) (3)

or (4) non-profit corporation and that qualifies for the Federal low-

income housing tax credit;

(6) Investments in low- and moderate-income areas that produce or

retain permanent jobs, the majority of which are held by low- and

moderate-income individuals;

(7) Investments in a national bank that has been approved by the

OCC as a national bank with a community development focus;

(8) Investments of a type approved by the Federal Reserve Board

under 12 CFR 208.21 for state member banks that are consistent with the

requirements of Sec. 24.3; and

(9) Investments of a type previously determined by the OCC to be

permissible under this part.

(b) Ineligible activities. Notwithstanding the provisions of this

section, a bank may not self-certify an investment if:

(1) The investment involves properties carried on the bank's books

as ``other real estate owned'';

(2) More than 25 percent of the investment funds projects in a

state or metropolitan area other than the states or metropolitan areas

in which the bank maintains its main office or branches; or

(3) The OCC determines, in published guidance, that the investment

is inappropriate for self-certification.

Sec. 24.7 Examination, records, and remedial action.

(a) Examination. National bank investments under this part are

subject to the examination provisions of 12 U.S.C. 481.

(b) Records. Each national bank shall maintain in its files

information adequate to demonstrate that it is in compliance with the

requirements of this part.

(c) Remedial action. If the OCC finds that an investment under this

part is in violation of law or regulation, is inconsistent with the

safe and sound operation of the bank, or poses a significant risk to a

Federal deposit insurance fund, the national bank shall take

appropriate remedial action as determined by the OCC.

Dated: September 13, 1996.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 96-23986 Filed 9-20-96; 8:45 am]

BILLING CODE 4810-33-P