Subsidiaries and Equity Investments

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 559, 560, 563, 567, 571

[No. 96-119]

RIN 1550-AA88

Subsidiaries and Equity Investments

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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

SUMMARY: The Office of Thrift Supervision (OTS or agency) is today

issuing a final rule updating and substantially streamlining its

regulations and policy statements concerning subsidiaries and other

subordinate organizations in which

[[Page 66562]]

savings associations have ownership interests (including operating

subsidiaries and service corporations) and equity investments

(including pass-through investments). These amendments are being made

pursuant to the Regulatory Reinvention Initiative of the Vice

President's National Performance Review (Reinvention Initiative) and

section 303 of the Community Development and Regulatory Improvement Act

of 1994 (CDRIA), which requires OTS and other federal banking agencies

to review, streamline, and modify regulations and policies to improve

efficiency, reduce unnecessary costs, and remove inconsistent, outmoded

and duplicative requirements.

EFFECTIVE DATE: January 1, 1997.

FOR FURTHER INFORMATION CONTACT: Deborah Merkle, Project Manager,

Supervision Policy, (202) 906-5688; Donna Deale, Manager, Supervision

Policy, (202) 906-7488; Susan Miles, Senior Attorney, Regulations and

Legislation Division, (202) 906-6798; Dean Shahinian, Senior Counsel

for Corporate Activities, Business Transactions Division, (202) 906-

7289; or Deborah Dakin, Deputy Chief Counsel, (202) 906-6445,

Regulations and Legislation Division, Chief Counsel's Office, Office of

Thrift Supervision, 1700 G Street, NW., Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Summary of Comments and Description of the Final Rule

A. General Discussion of the Comments

B. Section-by-Section Analysis

III. Disposition of Existing Rules

IV. Executive Order 12866

V. Paperwork Reduction Act

VI. Regulatory Flexibility Act Analysis

VII. Unfunded Mandates Act of 1995

VIII. Administrative Procedure Act and Effective Date

I. Background

Pursuant to section 303 of the CDRIA 1 and the

Administration's Reinvention Initiative, OTS began a comprehensive

review of its regulations in the spring of 1995. Early in that process,

OTS identified its regulations governing operating subsidiaries,

service corporations and other equity investments as one of the most

important areas for updating and streamlining. Each regulation in this

area was reviewed to determine whether it was current and

understandable; imposed the least possible burden consistent with

safety and soundness and statutory requirements; addressed subject

matter more suited for handbook guidance; and was written in a clear,

straightforward manner. OTS also sought industry input regarding

staff's initial recommendations through an industry focus group

consisting of thrift representatives, an industry trade association,

and OTS staff. The consensus that emerged from this process was that

regulatory burden could be reduced primarily by enhancing flexibility

and clarifying investment options available to savings associations,

including operating subsidiaries, service corporations, and pass-

through investments.

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

\1\ 12 U.S.C. 4803(a)(1).

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

As a result of this review, OTS identified a number of ways in

which its regulations could be revised to reduce regulatory burden. On

June 13, 1996, OTS issued a notice of proposed rulemaking.2 The

proposal reorganized some regulations into a chart to facilitate

comparisons of the different types of subordinate organizations;

replaced several application procedures with more streamlined notice

requirements; standardized the requirements applicable to pass-through

investments; revised the list of activities preapproved for thrift

service corporations; removed regulations dealing with finance

subsidiaries (which have largely been replaced by operating

subsidiaries); and restated the regulations in plain language.

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

\2\ 61 FR 29976 (June 13, 1996).

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

Today's final rule is substantially similar to the June proposal,

but incorporates several changes and clarifications in response to

comments received.

II. Summary of Comments and Description of the Final Rule

A. General Discussion of the Comments

The public comment period on the proposal closed on August 12,

1996. Ten commenters, including six federal savings associations, three

trade associations, and one mortgage guaranty insurance corporation,

submitted comments.

Eight of the ten commenters supported OTS efforts to clarify,

consolidate, and reorganize these regulations. They agreed that the

proposed regulatory changes will make it easier to make investments in

subordinate organizations. Several commenters specifically supported

the plain language drafting and accompanying chart, stating that these

changes will be useful and will reduce the burden of compliance with

the regulations. Most commenters who supported the proposal also made

suggestions for clarifications and modifications, which are discussed

in the section-by-section analysis. Two commenters, representing

current or potential competitors of savings associations or their

service corporations, urged OTS not to adopt, or to proceed more slowly

with, changes that would expand the list of preapproved activities for

service corporations of federal savings associations.

B. Section-by-Section Analysis

New Part 559-Subordinate Organizations

OTS proposed to adopt a new Part 559, Subsidiaries, that would

include all of the agency's regulations affecting thrift subsidiaries.

Commenters generally agreed with OTS's view that this reorganization

will make it much easier for savings associations to find and use these

regulations. OTS has retitled this part as ``Subordinate

Organizations'' in order to avoid potential confusion arising from the

use of the term ``subsidiary'' both as a generic term for a business

organization in which a savings association has an ownership interest

and as a more specific term used to describe a narrower category of

companies in which the savings association's ownership interest is

significant enough to give it direct or indirect control. A federal

savings association's ownership interest in a service corporation may

not be large enough to make that service corporation a ``subsidiary''

of the thrift, but the service corporation is still subject to federal

regulation under this part because the savings association is an owner

of the service corporation.

Section 559.1 What Does This Part Cover?

This section explains the scope of new Part 559 and sets forth

OTS's basic statutory authority over subordinate organizations. No

commenters addressed this section, which is adopted as proposed, with

minor technical corrections.

Section 559.2 Definitions (new)

As OTS reviewed the comments received on the proposal, it became

clear that adding a definitional section to Part 559 would help users

to identify more readily what types of entities are affected by the

various regulatory provisions. New Sec. 559.2 gathers in one location

definitions of key terms describing different types of entities in

which savings associations may invest.

[[Page 66563]]

These definitions are derived in large part from existing regulatory

definitions. The term ``subordinate organization'' encompasses all

business organizations in which a savings association has a direct or

indirect ownership interest except where that ownership interest has

been acquired through the use of the savings association's pass-through

investment authority (discussed below). ``Subsidiary'' is defined using

language taken from the Federal Deposit Insurance Corporation's

regulations governing notices filed for savings association

subsidiaries, 12 CFR 303.13(a)(1996). This definition turns primarily

on whether an association has control of the entity in which it

invests. For these purposes, OTS will use its standard definition of

``control,'' which appears in its change-of-control regulations, 12 CFR

Part 574. ``Operating subsidiary'' is defined as any entity that

satisfies the operating subsidiary requirements of new Sec. 559.3 and

is designated as an operating subsidiary by the investing association.

There are three basic characteristics of an operating subsidiary: (a) a

majority of its voting shares must be owned by the investing

association; (b) it must be controlled by the association; and (c) it

may engage only in activities that are permissible for the association.

``Service corporation'' is defined as any entity that satisfies the

service corporation requirements of new Sec. 559.3 and the authorizing

statute, 12 U.S.C. 1464(c)(4)(B), and is designated as a service

corporation by the investing association. Service corporations may

engage in activities reasonably related to the operation of a financial

institution. However, the amount of funds a federal savings association

may invest in service corporations is limited (as discussed below).

``Lower-tier entity,'' a new term, includes all business organizations

in which an operating subsidiary, service corporation, or other

subordinate organization has an ownership interest. It includes

entities often commonly referred to as ``second-tier service

corporations'' or ``service corporation subsidiaries.'' ``GAAP-

consolidated subsidiary'' is a newly defined term that describes all

operating subsidiaries and any service corporations or lower-tier

entities that are consolidated with a savings association for purposes

of filing reports in accordance with Generally Accepted Accounting

Principles (GAAP).

Section 559.3 What Are the Characteristics of, and What Requirements

Apply to, Subordinate Organizations of Federal Savings Associations?

Section 559.3 (proposed as Sec. 559.2) authorizes federal savings

associations to establish or acquire operating subsidiaries and service

corporations. Most of this section takes the form of a chart that lists

and compares the different characteristics of, and requirements that

apply to, operating subsidiaries and service corporations (including

lower-tier entities in which these companies invest). The chart is

derived in large part from the current regulations at 12 CFR 545.74

(service corporations) and 545.81 (operating subsidiaries). Where

appropriate, and for ease of reference, it cross-references other

applicable OTS regulations that have been the subject of frequent

questions to the agency. The chart reiterates that, in addition to

preapproved service corporation activities, a federal thrift may

continue to apply to OTS for case-by-case approval for a service

corporation to engage in any activity that is reasonably related to the

operation of a financial institution.

Commenters thought the chart would be a comprehensive and concise

reference source that would make it easier to compare these two

structures and determine which best fits the association's needs.

Commenters addressed several substantive areas covered by the

chart:

Preemption

The regulation sets forth OTS's long-standing position that state

law is preempted for operating subsidiaries to the same extent as it is

for the parent federal savings association. OTS has taken this position

because an operating subsidiary--which may only engage in activities

permissible for its parent federal savings association and must be

controlled by the investing savings association--is treated as the

equivalent of a department of the parent thrift for regulatory and

reporting purposes. In the past, OTS has not preempted state law for

service corporations because service corporations are not so closely

tied to the parent thrift.

One commenter asked that we reexamine whether state law should be

preempted for those service corporations that must be incorporated in

the state where the parent federal savings association is incorporated

(commonly referred to as first-tier service corporations).

Alternatively, this commenter urged that OTS consider relaxing or

eliminating the requirement that first-tier service corporations (in

contrast to operating subsidiaries and lower-tier entities) must be

organized in the state where their parent thrift has its home office.

The commenter argued that Sec. 5(c)(4)(B) of the Home Owners' Loan Act

(HOLA) only requires that a service corporation be incorporated in the

federal savings association's home state where a service corporation is

owned by more than one savings association.

Upon review, OTS continues to believe that state law should not be

preempted for service corporations of federal savings associations to

the same extent that it has been for federal savings associations and

their operating subsidiaries. Service corporations engage in activities

that are related to and promote, but go beyond, those permitted for

federal savings associations themselves. In contrast, operating

subsidiaries engage only in activities that could be conducted at the

parent thrift level. Additionally, unlike an operating subsidiary, a

service corporation need not be controlled by its parent thrift.

Moreover, a federal thrift may only invest a small portion of its

assets in service corporations, while no such limits apply to operating

subsidiaries. These distinctions make service corporations less

critical to the operations of federal savings associations. Therefore,

to date OTS has concluded that broad federal preemption for service

corporations is not necessary to facilitate the safe and sound

operation of federal savings associations, to enable federal savings

associations to conduct their operations in accordance with the best

practices of thrift institutions in the United States, or to further

other purposes of the HOLA. Although the agency could promulgate

preemptive regulations if circumstances warranting federal preemption

arise, the agency does not believe such circumstances exist at this

time. Accordingly, service corporations continue to be subject to state

law except where state law comes into direct conflict with federal law.

The home-state incorporation restriction that the commenter

alternatively suggests that OTS relax or eliminate is a statutory

requirement found at HOLA Sec. 5(c)(4)(B). That section provides that

federal savings associations may make investments ``in the capital

stock, obligations, or other securities of any corporation organized

under the laws of the State in which the Federal savings association's

home office is located, if such corporation's entire capital stock is

available for purchase only by savings associations of such State and

by Federal savings

[[Page 66564]]

associations having their home offices in such State.'' 3 The most

natural reading of this language is that a service corporation must

both: (a) be organized in the parent thrift's home state, and (b) sell

capital stock only to thrifts that have their home offices in that

state. This is how OTS and its predecessor have long read the statute.

OTS does not have the authority to override the statute. Nevertheless,

OTS would support a statutory change eliminating the home state

incorporation requirement. In our view, this requirement is an

unnecessary procedural hurdle with no connection to safety and

soundness.

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

\3\ 12 U.S.C. 1464(c)(4)(B) (emphasis added).

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

Inapplicability of HOLA Section 5(c) Investment Limits to Service

Corporations

One trade association commenter representing competitors of federal

savings associations reiterated a comment it had submitted on OTS's

Lending and Investment proposal. It argued that OTS should aggregate

commercial loans made by a federal thrift's service corporation with

commercial loans made by the thrift itself for purposes of calculating

investment limits under section 5(c)(2)(A). To do otherwise, it argues,

would circumvent Congress' intent to establish a ceiling on commercial

loan activity by savings associations.

The requirement that a service corporation's commercial loans be

aggregated with those of the parent thrift to determine compliance with

the limitation on commercial loans was previously established by OTS

regulation, not the HOLA. This requirement was removed by the final

Lending and Investments Rule, effective as of October 30, 1996.4

As discussed in the preamble to that regulation, the statutory language

imposing investment limits on commercial lending by savings

associations nowhere refers to loans made by service

corporations.5 Similarly, section 5(c)(4)(B) of the HOLA, which

authorizes investments in service corporations of up to 3% of a

thrift's assets, does not contain any sublimit on commercial lending by

service corporations.

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

\4\ 61 FR 50951 (September 30, 1996).

\5\ We also note that on September 30, 1996, following

publication of the January Lending and Investment proposal setting

forth OTS's interpretation of HOLA section 5(c)(2)(A), the Economic

Growth and Regulatory Paperwork Reduction Act of 1996 (``EGRPRA'')

enhanced the commercial lending authority of federal thrifts under

HOLA section 5(c)(2)(A), raising it by an additional 10% of assets

for commercial loans made to small businesses. In amending this

section, Congress did not in either statutory language or

legislative history indicate disapproval of OTS's interpretation of

this provision or the HOLA service corporation provision.

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

Accordingly, as proposed, the chart that appears in Sec. 559.3

reiterates that loans and investments made by service corporations are

not subject to the limits that apply to federal savings associations

under HOLA section 5(c).

Structure of Operating Subsidiaries and Service Corporations

One commenter specifically supported the provisions in the chart

that streamline the procedure for converting service corporations to

operating subsidiaries or operating subsidiaries to service

corporations. We reiterate that a savings association converting its

service corporation to an operating subsidiary must be certain that the

activity is permissible for a federal savings association.

Two commenters also suggested that the chart should address whether

an operating subsidiary may be structured as a limited partnership or

limited liability company (LLC).6 Both of these forms of

organization limit the liability of their owners to the amount of their

investment in much the same way as the liability of a stockholder of a

corporation is limited. While OTS expects that the vast majority of

operating subsidiaries will continue to be structured as corporations,

in the interest of increasing federal thrifts' flexibility in

structuring their operations, the agency has modified the chart by

removing specific references to ``incorporation''. An operating

subsidiary must still satisfy the basic requirements of majority

ownership interest, limited liability, and effective operating control.

Not all forms of organization will meet those requirements. OTS will

therefore continue to address requests by thrifts to establish an

operating subsidiary in a noncorporate form on a case-by-case basis

through its Sec. 559.11 notice and review process. Organizational forms

that meet the requirements of the regulation and do not present safety

and soundness concerns will be permitted.

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

\6\ LLCs are a relatively new form of business organization,

that have certain advantages of both the corporate and partnership

forms of ownership. They have become increasingly popular because

the Internal Revenue Service has allowed LLCs meeting certain

requirements to be taxed as partnerships.

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

The chart has been similarly amended to give service corporations

the potential to be organized in other forms. EGRPRA amended the Bank

Service Corporation Act to confirm that first-tier bank service

corporations may be established as LLCs. HOLA was not similarly

amended. Nothing in EGRPRA's legislative history or the legislative

history of the HOLA addresses whether savings association service

corporations may be organized as LLCs. Absent such guidance, OTS will

follow its standard practice of interpreting the HOLA in a manner that

does not elevate form over substance. Thus, OTS believes the HOLA

authorization to invest in service corporations should be read to

permit any organizational form that provides the same basic protections

as the corporate form of organization, including limited liability. Any

proposal to organize an LLC or a limited partnership as a first-tier

service corporation will be carefully reviewed in the Sec. 559.11

notice process to ascertain whether liability will in fact be limited

and whether any other safety and soundness concerns are presented.

Consolidation of Operating Subsidiaries with Their Parent Savings

Associations

One commenter urged OTS to amend the chart to allow for waiver of

the requirement that operating subsidiaries are generally consolidated

with their parent thrift for purposes of investment authority and other

regulatory requirements. OTS does not believe that a specific waiver

provision is necessary. OTS regulations already provide, at 12 CFR

500.30(a), that the OTS Director ``may, for good cause and to the

extent permitted by statute, waive the applicability of any provision

of this chapter.'' That provision covers all OTS regulations except for

those containing statutorily mandated provisions. Because the operating

subsidiary form of organization is permitted by, but not specifically

addressed in OTS's statutory authority over federal savings

associations, most requirements governing operating subsidiaries are

not mandated by statute. OTS will review any requests to waive a

consolidation requirement on a case-by-case basis to determine whether

good cause exists.

OTS has also modified provisions of the chart summarizing the

capital and Qualified Thrift Lender (QTL) requirements to reflect

changes made to the underlying regulations in this or other recently

adopted OTS regulations. Other technical, non-substantive changes have

been made to make the chart easier to understand.

Section 559.4 What Activities Are Preapproved for Service

Corporations?

This section (proposed as Sec. 559.3) replaces the list of

preapproved activities found in current Sec. 545.74(c). This section

does not purport to list all possible activities that may be

permissible for service corporations of federal savings associations,

but only

[[Page 66565]]

those that have been preapproved and may be conducted by well-run

institutions upon notice to OTS. Other unlisted activities that are

reasonably related to the operation of financial institutions will be

considered on a case-by-case basis upon application to OTS.

The proposal revised the list of preapproved activities to:

Affirm that any activity a federal thrift may conduct

directly, except deposit-taking, is preapproved for a service

corporation, when conducted in the same manner as allowed at the

federal savings association level. This includes all activities listed

in the HOLA and Part 560, as well as other incidental powers addressed

in OTS legal opinions and guidance.

Include certain activities that the OTS already routinely

approves on a case-by-case basis.

Allow business and professional activities that involve

financial documents, financial clients, or are generally finance-

related to be performed for any person.

Permit a limited number of services that have not been

previously authorized, but are reasonably related to the operation of a

financial institution and have been permitted for bank operating

subsidiaries or bank service corporations.

Three commenters thought the proposed additions to the list of

preapproved activities for service corporations would be helpful in a

variety of ways: business plans could be developed more efficiently;

uncertainty over whether activities are permissible would be

eliminated; and, as a result, federal savings associations could

function more efficiently.

One commenter requested that the agency clarify that the presence

of an activity on the list of preapproved activities does not

necessarily imply that federal savings associations cannot conduct the

activity directly. This is correct, but it should also be noted that

the activities listed in the regulation may be conducted without being

subject to the same limits that apply to the parent federal savings

association except where specifically provided. For example, service

corporations may perform some services for third parties that the

federal savings association may only perform for itself.

One trade association commenter representing competitors of savings

associations argued that the proposed regulation would expand the

activities permissible for service corporations too far. It only

supported the modification of preapproved activities to include those

previously authorized and permitted for bank operating subsidiaries or

bank service corporations. This commenter also objected to permitting

preapproved ``financial-related'' or ``credit-related'' activities to

be performed for anyone (rather than only primarily for financial

institutions), and characterized the proposal's changes as

``substantive modifications that go beyond regulatory burden

reduction.''

OTS does not agree. The effect of today's amendments is not to

expand the scope of permissible service corporation activities. The

service corporation regulation has never purported to list all

``permissible'' activities of service corporations of federal savings

associations, but only those ``preapproved.'' Under both the current

and the new regulation, federal savings associations may apply to OTS

for approval of any proposed service corporation activity that is

``reasonably related'' to the activities of federal savings

associations and other financial institutions.7 OTS believes that

once it has become familiar with an activity and determined that it is

``reasonably related,'' the activity should be added to the preapproved

list. No purpose is served by requiring well-run institutions to file

applications (rather than notices) to engage in these activities, pay

higher fees, and wait for agency approvals. Today's action merely

reduces the procedural hurdles that service corporations of well-run

federal savings associations must scale before engaging in certain

permissible activities by replacing application requirements with

notice requirements.

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

\7\ See the introductory text to current 12 CFR 545.74(c)(1996).

See also Sec. 559.3(e)(2)(i) of today's final rule.

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

Of course, savings associations may continue to apply to OTS for

case-by-case approval for their service corporations to engage in

activities not on the preapproved list, or for the service corporation

to provide services to a broader range of customers than those

specified for some categories of activities on the preapproved list.

Today's additions to the preapproved list will place federal

thrifts on a more level playing field with competitors (including non-

depository financial institutions) by allowing thrift service

corporations to engage in profitable businesses that do not carry

significant risks and that may be synergistic with the core thrift

business.

Mortgage Insurance

OTS requested comment on whether service corporations should be

permitted to engage in activities related to private mortgage insurance

(mortgage insurance). As part of its recent Conflicts of Interest,

Corporate Opportunity, and Hazard Insurance rulemaking,8 OTS has

removed Sec. 563.44 of its regulations, which had significantly limited

the mortgage insurance activities of federal savings associations and

their subordinate organizations, by, among other things, limiting the

circumstances under which a savings association could insure any loan

with a mortgage insurance company in which it had a significant direct

or indirect interest.

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

\8\ 61 FR 60173 (November 27, 1996).

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

One trade association commenter urged OTS not to make underwriting

mortgage insurance a preapproved activity for service corporations and

to proceed with caution in allowing service corporations to enter the

mortgage insurance business. This commenter believed that mortgage

insurance underwriting presents different risks than other insurance

products because, among other reasons, it is non-cancelable, its

premium is fixed for the duration of the policy, and it covers the

riskiest type of single-family mortgage. If underwriting mortgage

insurance is permitted, this commenter believed OTS should require an

application, separate capitalization of the subsidiary, and arms'

length transactions.

A second commenter urged OTS to make underwriting of captive

mortgage reinsurance (``CMR'') (reinsurance solely of loans originated

by an affiliated federal savings association and insured by a primary

mortgage insurance provider) a preapproved activity. This commenter

pointed out that the mortgage insurance industry is a highly regulated

industry subject to comprehensive state and federal insurance

regulatory requirements and oversight, as well as the ongoing scrutiny

of the mortgage lending industry and secondary markets. The commenter

specifically did not address the direct underwriting of mortgage

insurance or general reinsurance of mortgage insurance.

Based on this commenter's description of CMR, it appears that CMR

could be an activity ``reasonably related to the activities of

financial institutions.'' At this point, however, OTS believes that the

underwriting of captive mortgage reinsurance and other mortgage

insurance-related activities should be considered on a case-by-case,

rather than a preapproved, basis. This is consistent with the approach

OTS has generally taken when authorizing new service corporation

activities in order to

[[Page 66566]]

gain additional supervisory experience with a particular business over

time before prescribing standards for preapproval. A savings

association that is interested in conducting reinsurance activity

through a service corporation may file an application with the agency

describing how it would propose to conduct the activity and what

safeguards it would put in place.

In addition to the activities listed as preapproved in the

proposal, the final rule adds two activities that the Federal Reserve

Board, on September 6, 1996, proposed to authorize for bank holding

companies: (1) finance-related management consulting and management

consulting for financial institution clients; and (2) printing and

selling checks and related documents. If the Federal Reserve's rule is

adopted in final form, these activities will automatically become

authorized for bank service corporations by operation of 12 U.S.C.

1864(f).

In its proposal, OTS signalled its intent to review activities

authorized for bank service corporations in making additions to the

preapproved list. Although the two activities described above have not

yet been adopted in final form by the Federal Reserve Board, they are

clearly ``reasonably related'' to the business of financial

institutions and, unlike the reinsurance activities described above, do

not require significant capital or present other novel issues.

Accordingly, the two activities have been added to the preapproved

list.

Section 559.5 How Much May a Savings Association Invest in Service

Corporations or Lower-Tier Entities?

Proposed Sec. 559.4 (now Sec. 559.5) replaced Sec. 545.74(d), and

reiterated that a federal savings association may invest in the

aggregate 3% of its assets in one or more service corporations as long

as the excess investment over 2% serves primarily community, inner

city, or community development purposes. The proposal simplified the

rules governing when a federal savings association may make loans to

service corporations separate from the 3% of assets limit. Under the

proposal, the only restrictions were that such additional loans: (1) be

authorized elsewhere under the HOLA; (2) satisfy applicable percentage

of assets limits (e.g., 10-20% of assets for commercial loans); and (3)

comply with the loans-to-one-borrower (LTOB) regulation.

Commenters generally agreed that the proposal would significantly

condense and simplify the rules governing when a federal savings

association may make loans to service corporations separate from the 3%

of assets limit. Two commenters supported the proposed changes to these

limits, believing that simplification would help institutions operate

more efficiently. One thought the proposed changes would enhance growth

opportunities without undermining the parent's safety and soundness and

allow greater flexibility within multiple service corporation

structures.

Two commenters, however, expressed concern with the requirement

that loans by a thrift to its service corporations and lower-tier

entities comply with the LTOB regulation. They argued that under the

current regulation, some institutions are making loans in a safe and

sound manner, not posing significant concentration risks, and are

exceeding the thrift's LTOB limits. After reviewing the commenters'

concerns, we agree that there are better ways to promote the goals of

limiting and prudently diversifying the risks presented by savings

associations' loans to subordinate organizations. In fashioning a final

rule, we looked at not only the protections provided by LTOB, but also

those afforded by the capital regulation and the HOLA section 5(c)

investment limits.

The final rule continues to allow federal thrifts the flexibility

to place loans to service corporations or lower-tier entities in either

the HOLA section 5(c)(4)(B) investment category (service corporation

investments), or another applicable HOLA investment category (e.g.,

HOLA section 5(c)(2)(A)'s commercial lending authority), provided they

have available capacity in the chosen category. Section 559.5 does not

further limit the amount of such loans to a thrift's GAAP-consolidated

subsidiaries (regardless of whether such GAAP-consolidated subsidiaries

are service corporations or lower-tier entities). OTS believes that

there is no need to impose separate limits on loans to GAAP-

consolidated subsidiaries for several reasons. First, if the GAAP-

consolidated subsidiary is engaged only in activities permissible for a

national bank, its structure and risk are the equivalent of those of a

traditional national bank operating subsidiary. Pursuant to 12 CFR

32.1(c), a national bank's loans to its operating subsidiaries are not

subject to lending limits. Second, if the GAAP-consolidated subsidiary

is engaged in activities that are not permissible for a national bank,

the savings association must deduct its entire debt and equity

investment in calculating its core capital under 12 CFR

567.5(a)(2)(iv), regardless of the authority under which such

investments are made. As a result, even if the thrift were to lose its

entire investment, there would be no adverse impact on its regulatory

capital compliance. This provides assurance that such loans, if made,

will not adversely affect the viability of a federal savings

association. Therefore, we do not believe that any additional

limitations under Sec. 559.5 are necessary for GAAP-consolidated

subsidiaries.

For subordinate organizations that are not GAAP-consolidated

subsidiaries, Sec. 559.5 has been revised from the proposal to impose a

limit of 15% of the thrift's total capital on loans to any one

subordinate organization. The regulation further imposes a 50% of total

capital aggregate limit on loans to all subordinate organizations that

are not GAAP-consolidated subsidiaries. By contrast, the proposed rule

would have subjected all loans to a service corporation (even if GAAP-

consolidated) and to its lower-tier entities to an aggregate 15% of

capital limit.

To determine compliance with the ``15/50'' limits of the final

rule, a thrift's loans to the subordinate organization must be

aggregated with loans made by any GAAP-consolidated subsidiary to that

subordinate organization. The Regional Director may modify the 15/50

limits on a case-by-case basis for safety and soundness reasons.

One commenter requested clarification that the additional loan

authority is a separate authority from the HOLA section 5(c)(4)(B)

investment authority, and not something that is limited to situations

where that authority has been exhausted. This is correct.

A commenter requested that, where an entity may be considered

either a service corporation or a pass-through entity under Sec. 560.32

(discussed below), OTS clarify that the investment could be apportioned

between the two authorities. OTS's longstanding position remains that

investments that are authorized under two or more separate provisions

of law may be made under either provision, or allocated between both

provisions, to the extent that the savings association has remaining

investment authority available under the applicable limits.

Subpart B--Regulations Applicable to All Savings Associations

Section 559.10 How Must Separate Corporate Identities be Maintained?

This section describes what a savings association and its

subordinate organizations must do to establish and maintain separate

identities. The purpose for these requirements, derived

[[Page 66567]]

from current Secs. 545.81(f), 563.37, and 571.21, is to reduce the

potential for customer confusion or for a court to hold the parent

liable for the subordinate organization's conduct or obligations. Two

commenters specifically supported this section. One of these commenters

noted generally, however, that corporate separateness should not

unnecessarily restrict the ability to advertise and cross-market

products. OTS does not believe that the continuation of these long-

standing requirements will in any way hamper the ability of a savings

association and its subordinate organizations to advertise or cross-

market each other's products. The section is being adopted as proposed.

Section 559.11 What Notices Are Required to Establish or Acquire a New

Subsidiary or Engage in New Activities Through an Existing Subsidiary?

This section combines and streamlines the overlapping notice

requirements currently contained in Secs. 545.74(b)(2), 545.81(c), and

563.37(c). Two commenters expressly supported the streamlined notice

and application procedures. This section is being adopted as proposed.

Section 559.12 How May a Subsidiary of a Savings Association Issue

Securities?

OTS proposed this section to replace current Sec. 563.132,

requiring that a savings association notify OTS before a subsidiary

issues securities. The proposed section also incorporated requirements

from current Sec. 545.82 (finance subsidiaries of federal savings

associations) requiring that securities issued by all subsidiaries

indicate that they are not covered by federal deposit insurance and may

not be called or accelerated in the event of the savings association's

insolvency.

One commenter requested clarification that Sec. 559.12 does not

apply to securities issuances to the parent or for a subsidiary's own

corporate needs (as compared to issuing securities to a third party and

forwarding the proceeds to the parent), arguing that such issuances

were not covered by Sec. 563.132 or Sec. 545.82 and that applying the

regulation to such issuances would increase regulatory burden. OTS has

reexamined the scope of not only Secs. 563.132 and 545.82, but also the

notice requirements of new Sec. 559.11, which requires savings

associations to provide OTS with 30-days advance notice before

conducting a new activity in a subsidiary. OTS has always considered

the issuance of securities to be an activity covered by these

provisions. Issuance of securities by a subsidiary, especially if the

parent savings association expects to transfer any assets or make any

guarantees in connection with the issuance, is a matter of which the

regulator needs to be aware.

Upon review, however, OTS believes that its supervisory concerns

can be satisfied by receiving initial notice that the subsidiary will

be issuing securities. The more detailed reporting requirements of

proposed Sec. 559.12 have been replaced by a less burdensome

recordkeeping requirement so that the examination process can

thereafter monitor the actual securities issuances. Accordingly, a

savings association must notify OTS under Sec. 559.11 before it

initially issues securities through a subsidiary, regardless of the

purpose to which the proceeds will be put. Thereafter, no further

notices are required, but savings associations and their subsidiaries

should maintain records of their securities issuances under Sec. 559.12

available for review by OTS examiners for as long as the securities are

outstanding. Section 559.12 has been modified accordingly.

Section 559.13 How May a Savings Association Exercise its Salvage

Power in Connection With its Service Corporation or Lower-Tier

Entities?

This section replaces the application procedure for salvage

investments of current Sec. 563.38 with a 30-day notice requirement. In

its notice, an institution must fully document its additional

investment in a service corporation or a lower-tier entity in a manner

that demonstrates how its action is consistent with safety and

soundness and document other salvage alternatives considered. If the

agency has concerns, it may take objection to, or grant conditional

approval of, a notice to exercise such salvage power. One commenter

expressly supported the change to a notice requirement.

This section is being adopted as proposed, with one modification.

Language is being added to emphasize that investments made using

salvage power authority are, as they have always been, considered

investments for purposes of the capital regulation. Thus, for example,

a salvage investment in a nonincludable subsidiary would be deducted in

calculating the thrift's capital.

Amendments to Part 560--Lending and Investment

OTS also proposed to add certain provisions dealing with

subordinate organizations and equity-related investments, such as

service corporations, pass-through investments and de minimis

investments to Part 560, Lending and Investments. These additions will

make that part a comprehensive resource for users seeking information

on federal savings associations' lending and investment authorities.

Section 560.30 General Lending and Investment Powers for Federal

Savings Associations

In the interest of completeness, OTS proposed to add several

equity-related investments to the lending and investment powers chart

contained in this regulation. Investments in the following entities are

being added as proposed: Small business investment corporations

chartered pursuant to Sec. 301(d) of the Small Business Act; open-end

management investment companies; and service corporations. The chart

has also been modified to reflect recent statutory amendments enhancing

and clarifying federal savings associations' educational, credit card,

and small business lending authority enacted as part of EGRPRA.

Finally, the chart is being amended to clarify that liquidity

investments are authorized under 12 U.S.C. 1464(c)(1)(M) as long as

they are of a type that would qualify as liquid asset investments under

12 CFR part 566. The maturity limitations of that part generally do not

affect this authorization. This carries forward language from former 12

CFR 545.71 that was inadvertently omitted from the final lending and

investment rule when liquidity investments were added to the chart.

Section 560.32 Pass-Through Investments

This new section codifies federal savings associations' authority

to invest in entities, such as limited partnerships and mutual funds,

that hold only assets, and engage only in activities, permissible for

federal savings associations. By clarifying the rules applicable to

pass-through investments, this section enhances savings associations'

access to this investment option. The section also establishes uniform

safety and soundness constraints, ensuring that the OTS is aware of,

and has the opportunity to object to, any move by a thrift to place

significant amounts of its assets under the operating control of third

parties.

A federal savings association's ability to make pass-through

investments is derived from the same incidental authority pursuant to

which it invests in operating subsidiaries. Pass-through entities

differ from operating subsidiaries, however, in that a thrift

[[Page 66568]]

must have majority ownership of an operating subsidiary but may not

control a pass-through entity. Unlike a service corporation, which is

usually structured as a corporation and which may potentially engage in

a broader range of activities than a federal savings association, pass-

through investments (except for investments made primarily in order to

use a corporation's services under Sec. 560.32(b)(5)(v)) may take the

form of stock investments only with special approval from OTS and may

only be made in entities that engage in activities that a federal

savings association could conduct directly.

Investments that satisfy the conditions enumerated in this section

will not require advance notice to OTS. A savings association must

provide written notice to OTS before making any pass-through investment

that does not meet those standards. OTS will review these notices and

may object or impose conditions for supervisory, legal, or safety and

soundness reasons.

Loans that a savings association makes to an entity in which it has

made a pass-through equity investment will be subject to the LTOB rule

in the same manner as loans by a savings association to any third

party. Absent particular safety and soundness concerns, such loans will

not be aggregated with pass-through equity investments made pursuant to

this section for purposes of either LTOB restrictions or restrictions

under this section.

Commenters supported codifying pass-through investments because the

requirements would be more clearly set forth and the approval process

would be more predictable.

One commenter requested that OTS confirm that the restrictions

applicable to pass-through investments do not apply to operating

subsidiaries. A thrift's investment in its operating subsidiary is not

subject to the restrictions set forth in this section. Pass-through

investments made by an operating subsidiary would, however, be subject

to this section.

Two commenters argued that LLCs should be a preapproved structure

for pass-through investments. OTS agrees that LLCs should be a

preapproved pass-through investment structure, as they offer a number

of benefits to thrifts while containing adequate safeguards. Consistent

with other preapproved entities, LLCs are generally structured to

provide a thrift with limited liability equal to the amount invested.

OTS believes that by preapproving this structure for potential pass-

through investments, thrifts will enjoy greater flexibility and a lower

regulatory burden, especially in the community development area.

Section 560.36 De minimis investments

This section (proposed as Sec. 560.33) specifically confirms that a

federal savings association may make de minimis equity investments in

community organizations in which national banks may invest. Total

investments made under this section may not exceed the greater of \1/4\

of 1% of an association's total capital or $100,000.

Two commenters argued that OTS should increase the permissible

investment for well-capitalized, CAMEL 1- or 2-rated institutions to 5%

of capital, in the aggregate, so long as deducting the investment from

capital would not cause the institution to fall into a lower capital

category and up to 10% of capital on application to OTS. This would

parallel limits for national banks under 12 U.S.C. 24 (Eleventh) and 12

CFR part 24.

The HOLA does not contain a provision paralleling the authority of

12 U.S.C. 24 (Eleventh). However, OTS and its predecessor have long

recognized that a federal savings association's incidental powers

include the ability to make charitable contributions that assist its

community. New Sec. 560.36 allows thrifts to contribute to their

communities by making equity investments in community organizations

that do not exceed what they could otherwise generally directly

contribute and deduct for tax purposes. Because this is a new

regulation and federal thrifts have other community development

investment options not available to national banks, OTS is not inclined

to increase the de minimis limit at this time.

In this regard, we note that federal thrifts may, in addition to

the de minimis authority set forth under this section, make community-

related investments through their 3% of assets service corporation

investment authority. The HOLA, in fact, requires that a thrift wishing

to take full advantage of its authority to invest up to 3% of its

assets in service corporations must dedicate at least 1% of those

assets to investments promoting community, inner-city, or community

development purposes. Additional investments may also be possible using

an operating subsidiary, lower-tier entity, or pass-through investment.

Accordingly, this section is adopted as proposed, with the limits

proposed.

Amendments to Other Regulatory Sections

Section 545.74 Service Corporations

The bulk of this section has been incorporated into new part 559,

Subordinate Organizations. The one exception is the safeguards that

apply to securities brokerage activities of service corporations, which

have been governed by 12 CFR 545.74(c)(4). OTS proposed to amend this

paragraph to remove a prohibition against savings associations

contracting with third parties for securities brokerage activities, but

to otherwise leave it unchanged while the agency considered whether to

incorporate this paragraph into part 559 or to modify the safeguards

and apply them to all securities sales programs taking place on thrift

premises by any entity, including service corporations, affiliates, and

third party broker-dealers.

One commenter addressed this issue. The commenter supported the

removal of the prohibition on federal savings associations contracting

with third parties for securities brokerage activities, but argued that

all of Sec. 545.74(c)(4) duplicates existing regulations and

interagency guidelines and should be removed. At this point, the agency

has decided to deal with the broader issues of securities sales on

association premises, including sales by service corporations, as part

of a later rulemaking. This comment will be considered as part of that

rulemaking. Accordingly, Sec. 545.74(c)(4) is being amended and

retained as Sec. 545.74, ``Securities Brokerage,'' to better reflect

its new scope.

Section 545.77 Real Estate for Offices and Related Facilities

This section was not addressed in the proposal. It sets forth

federal savings associations' incidental authority to acquire real

estate for their current and anticipated future office needs. The

section is being recodified as new Sec. 560.37 without substantive

change.

Section 545.82 Finance Subsidiaries

The proposal proposed to remove this section and to deem all

existing finance subsidiaries to be operating subsidiaries. All of the

functions performed by finance subsidiaries may already be done with

fewer restrictions by an operating subsidiary. The two commenters

addressing this section supported the proposal. Accordingly,

Sec. 545.82 is being deleted.

Section 560.93 Lending Limitations

This section is being amended in connection with the amendments

made today to new Sec. 559.5. Under the current

[[Page 66569]]

section, a thrift's loans to its subsidiaries (defined as 5% or greater

ownership) or affiliates are not subject to the LTOB limitations of

this section. Loans by a thrift or any of its subsidiaries to a third

party are aggregated, however, for purposes of this section. As

amended, the section will generally not apply to loans made by a

savings association to any of its subordinate organizations as the

amount of such loans is governed by new Sec. 559.5.9 As presently,

it will also not apply to loans made to an affiliate of the savings

association, as the amount of those loans continues to be governed by

Sec. 563.41. Loans by a savings association or any of its subsidiaries

(now defined as entities of which the savings association has direct or

indirect control) to a third party are subject to this section.

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

\9\ Loans that a thrift makes to a third party that invests in

the thrift's subordinate organization will be aggregated with any

loans by the thrift to that subordinate organization in accordance

with the combination rules that generally apply under the LTOB

regulation.

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

Section 563.41 Loans and Other Transactions With Affiliates and

Subsidiaries

OTS proposed to modify the definition of ``subsidiary'' in

Sec. 563.41 to mirror the statutory definition of section 23A of the

Federal Reserve Act, 12 U.S.C. 371c, rather than the OTS capital

regulation. The statutory definition turns on control, whereas the

capital regulation was based on a 5% ownership interest. No commenters

addressed this issue, but one commenter requested that OTS allow

sister-bank treatment between a thrift subsidiary and sister thrift.

Consistent with staff interpretations of the Federal Reserve, OTS has

interpreted the sister-bank exemption to be available between a thrift

subsidiary and sister thrift, provided the transaction would be covered

by the sister-bank exemption if conducted by the parent thrift of the

subsidiary.

The definition of ``subsidiary'' in Sec. 563.41 is being modified

as proposed.

Part 567--Capital

OTS proposed to simplify the calculation of investments in

subsidiaries for capital purposes by changing the definition of

``subsidiary'' in Sec. 567.1(dd) from 5% ownership to more than 50%

ownership, paralleling the treatment of subsidiaries by the other

federal banking agencies, and by removing language that defined

investments in subsidiaries in a manner that has resulted in savings

associations holding disproportionate amounts of capital against risks

presented by investments made in some lower-tier entities. Two

commenters supported these changes, stating that they would reduce

regulatory burden. OTS is adopting these changes as proposed with one

modification. Instead of referring to an ownership interest of 50% or

greater, the regulation will refer to ownership interests that would be

consolidated under GAAP. These are generally majority investments, so

this change will not affect most savings associations. However, this

modification will help to reduce confusion in the limited situations

where GAAP, which is used as the basis for reporting under the Thrift

Financial Report that savings associations file quarterly with OTS,

uses a different standard than majority ownership.

III. Disposition of Existing Rules

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

Original provision New provision Comment

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

545.74(a)................... .................... Removed.

545.74(b) introductory text. 560.30.............. Incorporated into

lending and

investment powers

chart.

545.74(b)(1)................ 559.3(e)(2).........

545.74(b)(2)................ 559.11..............

545.74(b)(3)................ 559.3(e)(2)(ii).....

545.74(b)(4)................ 559.3(o)(2).........

545.74(b)(5)................ 559.1(a)............

545.74(c) introductory text. 559.3(e)(2).........

545.74(c)(1)-(7) except for 559.4...............

(c)(4).

545.74(c)(4)................ 545.74.............. Modified.

545.74(d)................... 559.5............... Substantially

revised.

545.74(e)................... 559.3(q)(2).........

545.76(a)................... 560.30..............

545.76(b)................... .................... Removed.

545.77...................... 560.37..............

545.80...................... 560.30..............

545.81(a)................... 559.3...............

545.81(b)................... 559.3(c)(1), (e)(1).

545.81(c)(1), (2)........... 559.3(a)(1).........

545.81(c)(3)................ 559.11..............

545.81(d)................... 559.3(p)............

545.81(e)................... 559.3(h)(1).........

545.81(f)................... 559.10..............

545.81(g)................... 559.3(o)(1).........

545.81(h)................... 559.1(a)............

545.81(i)................... 559.1(b)............ Modified.

545.81(j)................... 559.3(e)(1).........

545.81(k)................... 559.3(p)............

545.82...................... .................... Removed.

560.93(a)................... .................... Modified.

563.37(a), (b).............. 559.10.............. Modified.

563.37(c)................... 559.11..............

563.38...................... 559.13.............. Modified.

563.41(b)(4)................ .................... Modified.

563.132(a), (b)............. .................... Removed.

563.132(c).................. 559.12.............. Modified.

[[Page 66570]]

567.1(l).................... .................... Modified.

567.1(dd)................... .................... Modified.

571.21...................... 559.10.............. Modified.

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

IV. Executive Order 12866

The Director of the OTS has determined that this final rule does

not constitute a ``significant regulatory action'' for the purposes of

Executive Order 12866.

V. Paperwork Reduction Act

The reporting requirements at 12 CFR 560.32 have been submitted to

and approved by the Office of Management and Budget under OMB control

number 1550-0078. The information is needed by the OTS to assist in

regulating savings associations and their subsidiaries.

The final rule differs from the proposal in that 12 CFR 559.12 no

longer contains the requirement to notify the OTS in writing following

a securities issuance. The information that would have been contained

in the notice is now a recordkeeping requirement. At the proposed rule

stage, the burden attributed to Sec. 559.12, approved under OMB control

no. 1550-0013, remained unchanged. Since the change from the notice

requirement to a recordkeeping requirement constitutes a reduction in

burden, the information collection package under 1550-0013 has been

submitted to OMB for review.

Comments on the collections of information should be sent to the

Office of Management and Budget, Paperwork Reduction Project (1550),

Washington, DC 20503, with copies to the Office of Thrift Supervision,

1700 G Street, NW., Washington, D.C. 20552.

Under the Paperwork Reduction Act of 1995, no persons are required

to respond to a collection of information unless it displays a valid

OMB control number. The valid OMB control number assigned to the

collection of information in this final rule will be displayed in the

table at 12 CFR 506.1(b).

VI. Regulatory Flexibility Act Analysis

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

certifies that this final rule will not have a significant impact on a

substantial number of small entities. The final rule streamlines

requirements for all savings associations. It simplifies the

requirements that apply when savings associations create, invest in, or

conduct new activities through a variety of subordinate organizations

or pass-through investments, and clarifies the statutorily required

notices for such actions. The final rule will make it easier for small

savings associations to locate the rules that apply to their

investments.

VII. Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.

104-4 (Unfunded Mandates Act), requires that an agency prepare a

budgetary impact statement before promulgating a rule that includes a

federal mandate that may result in expenditure by state, local, and

tribal governments, in the aggregate, or by the private sector, of $100

million or more in any one year. If a budgetary impact statement is

required, section 205 of the Unfunded Mandates Act also requires an

agency to identify and consider a reasonable number of regulatory

alternatives before promulgating a rule. As discussed in the preamble,

this final rule reduces regulatory burden. OTS has determined that the

final rule will not result in expenditures by state, local, or tribal

governments or by the private sector of $100 million or more.

Accordingly, this rulemaking is not subject to section 202 of the

Unfunded Mandates Act.

VIII. Administrative Procedure Act and Effective Date

This final rule results from the notice of proposed rulemaking OTS

published on June 13, 1996. In addition to the regulatory language

proposed in that notice, OTS is today redesignating, without

substantive change, other regulations located in Part 545 into new Part

559. The chart in Part 560 has also been updated to reflect changes in

statutory provisions in EGRPRA on September 30, 1996. Pursuant to

section 553(b) of the Administrative Procedure Act, OTS hereby finds

that good cause exists not to publish those provisions for public

notice and comment. These provisions are merely being renumbered and

updated for the convenience of users, thus public notice and

opportunity to comment are unnecessary.

Section 553(d) of the Administrative Procedure Act, 5 U.S.C. 553(d)

permits an agency to waive the normal 30-day delay in effective date

when a rule relieves a restriction. OTS finds good cause to make the

rule effective in fewer than 30 days because the rule imposes no new

regulatory burdens and relieves restrictions by streamlining

application and notice requirements.

List of Subjects

12 CFR Part 545

Accounting, Consumer protection, Credit, Electronic funds

transfers, Investments, Reporting and recordkeeping requirements,

Savings associations.

12 CFR Part 559

Reporting and recordkeeping requirements, Savings associations,

Subsidiaries.

12 CFR Part 560

Consumer protection, Investments, Manufactured homes, Mortgages,

Reporting and recordkeeping requirements, Savings associations,

Securities.

12 CFR Part 563

Accounting, Advertising, Conflicts of Interest, Corporate

Opportunity, Crime, Currency, Investments, Mortgages, Reporting and

recordkeeping requirements, Savings associations, Securities, Surety

bonds.

12 CFR Part 567

Capital, Savings associations.

12 CFR Part 571

Accounting, Investments, Reporting and recordkeeping requirements,

Savings associations.

Accordingly, and for the reasons set forth in the preamble, the

Office of Thrift Supervision amends chapter V, title 12, Code of

Federal Regulations, as set forth below.

PART 545--OPERATIONS

1. The authority citation for part 545 continues to read as

follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.

2. Section 545.74 is amended by:

a. Revising the section heading;

b. Removing paragraphs (a), (b), the paragraph heading and

introductory text of paragraph (c), paragraphs (c)(1) through (c)(3),

paragraph (c)(4)(ii)(F), paragraphs (c)(5) through (c)(7), and

paragraphs (d) and (e);

c. Removing the paragraph heading of paragraph (c)(4);

[[Page 66571]]

d. Redesignating paragraphs (c)(4)(i) introductory text,

(c)(4)(i)(A) through (c)(4)(i)(E), (c)(4)(ii) introductory text,

(c)(4)(ii)(A) through (c)(4)(ii)(E), (c)(4)(ii)(G), (c)(4)(iii), and

(c)(4)(iv) as paragraphs (a) introductory text, (a)(1) through (a)(5),

(b) introductory text, (b)(1) through (b)(5), (b)(6), (c), and (d),

respectively;

e. Revising the introductory text of newly designated paragraph

(a);

f. Removing, in newly designated paragraph (b) introductory text,

the phrase ``this paragraph (c)(4)(ii)'', and by adding in lieu thereof

the phrase ``this paragraph (b)'';

g. Removing, in newly designated paragraph (b)(1), the phrase

``under paragraph (c)(3) of this section'', and by adding in lieu

thereof the phrase ``Sec. 559.4 of this chapter''; and

h. Removing, in newly designated paragraph (c), the phrase

``paragraph (c)(4) of'', wherever it appears.

The revisions read as follows:

Sec. 545.74 Securities brokerage.

(a) A service corporation may execute securities transactions on an

agency or riskless principal basis solely upon the order of and for the

account of customers, and may provide standardized and individualized

investment advice to individuals or entities, provided that the service

corporation:

* * * * *

Secs. 545.76, 545.77, 545.80-545.82 [Removed]

3. Sections 545.76, 545.77, 545.80, 545.81, and 545.82 are removed.

4. Part 559 is added to read as follows:

PART 559--SUBORDINATE ORGANIZATIONS

Sec.

559.1 What does this part cover?

559.2 Definitions.

Subpart A--Regulations Applicable to Federal Savings Associations

559.3 What are the characteristics of, and what requirements apply

to, subordinate organizations of federal savings associations?

559.4 What activities are preapproved for service corporations?

559.5 How much may a savings association invest in service

corporations or lower-tier entities?

Subpart B--Regulations Applicable to All Savings Associations

559.10 How must separate corporate identities be maintained?

559.11 What notices are required to establish or acquire a new

subsidiary or engage in new activities through an existing

subsidiary?

559.12 How may a subsidiary of a savings association issue

securities?

559.13 How may a savings association exercise its salvage power in

connection with its service corporation or lower-tier entities?

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828.

Sec. 559.1 What does this part cover?

(a) OTS is issuing this part 559 pursuant to its general rulemaking

and supervisory authority under the Home Owners' Loan Act, 12 U.S.C.

1462 et seq., and its specific authority under section 18(m) of the

Federal Deposit Insurance Act, 12 U.S.C. 1828(m). Subpart A of this

part 559 applies to subordinate organizations of federal savings

associations. Subpart B of this part applies to subordinate

organizations of all savings associations. OTS may, at any time, limit

a savings association's investment in any of these entities, or may

limit or refuse to permit any activities of any of these entities for

supervisory, legal, or safety and soundness reasons.

(b) Notices under this part are applications for purposes of

statutory and regulatory references to ``applications.'' Any conditions

that OTS imposes in approving any application are enforceable as a

condition imposed in writing by the OTS in connection with the granting

of a request by a savings association within the meaning of 12 U.S.C.

1818(b) or 1818(i).

Sec. 559.2 Definitions.

For purposes of this part:

Control has the same meaning as in part 574 of this chapter.

GAAP-consolidated subsidiary means an entity in which a savings

association has a direct or indirect ownership interest and whose

assets are consolidated with those of the savings association for

purposes of reporting under Generally Accepted Accounting Principles

(GAAP). Generally, these are entities in which a savings association

has a majority ownership interest.

Lower-tier entity includes any company in which an operating

subsidiary or a service corporation has a direct or indirect ownership

interest.

Operating subsidiary means any entity that satisfies all of the

requirements for an operating subsidiary set forth in Sec. 559.3 of

this part and that is designated by the parent savings association as

an operating subsidiary pursuant to Sec. 559.3 of this part. More than

50% of the voting shares of an operating subsidiary must be owned,

directly or indirectly, by a federal savings association and no other

person or entity may exercise effective operating control. An operating

subsidiary may only engage in activities permissible for a federal

savings association.

Ownership interest means any equity interest in a business

organization, including stock, limited or general partnership

interests, or shares in a limited liability company.

Service corporation means any entity that satisfies all of the

requirements for service corporations in 12 U.S.C. 1464(c)(4)(B) and

Sec. 559.3 of this part and that is designated by the investing savings

association as a service corporation pursuant to Sec. 559.3 of this

part. A service corporation must be organized under the laws of the

state where the federal savings association's home office is located,

may only be owned by savings associations with home offices in that

state, and may engage in the activities identified in Secs. 559.3(e)(2)

and 559.4 of this part.

Subordinate organization means any corporation, partnership,

business trust, association, joint venture, pool, syndicate, or other

similar business organization in which a savings association has a

direct or indirect ownership interest, unless that ownership interest

qualifies as a pass-through investment pursuant to Sec. 560.32 of this

chapter and is so designated by the investing savings association.

Subsidiary means any subordinate organization directly or

indirectly controlled by a savings association.

Subpart A--Regulations Applicable to Federal Savings Associations

Sec. 559.3 What are the characteristics of, and what requirements

apply to, subordinate organizations of federal savings associations?

A federal savings association (``you'') that meets the requirements

of this section, as detailed in the following chart, may establish, or

obtain an interest in an operating subsidiary or a service corporation.

For ease of reference, this section cross-references other regulations

in this chapter affecting operating subsidiaries and service

corporations. You should refer to those regulations for the details of

how they apply. The chart also discusses the regulations that may apply

to lower-tier entities in which you have an indirect ownership interest

through your operating subsidiary or service corporation. The chart

follows:

[[Page 66572]]

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

Operating subsidiary Service corporation

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

(a) How may a federal savings (1) You must file a notice (2) You must file a notice

association (``you'') establish an satisfying Sec. 559.11. Any satisfying Sec. 559.11. Depending

operating subsidiary or a service finance subsidiary that existed on upon your condition and the

corporation? January 1, 1997 is deemed an activities in which the service

operating subsidiary without corporation will engage, Sec.

further action on your part. 559.3(e)(2) may require you to file

an application.

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

(b) Who may be an owner? (1) Anyone may have an ownership (2) Only savings associations with

interest in an operating home offices in the state where you

subsidiary. have your home office may have an

ownership interest in any service

corporation in which you invest.

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

(c) What ownership requirements (1) You must own, directly or (2) You are not required to have any

apply? indirectly, more than 50% of the particular percentage ownership

voting shares of the operating interest and need not have control

subsidiary. No one else may of the service corporation.

exercise effective operating

control.

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

(d) What geographic restrictions (1) An operating subsidiary may be (2) A service corporation must be

apply? organized in any geographic organized in the state where your

location. home office is located.

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

(e) What activities are permissible? (1) After you have notified OTS in (2)(i) If you are eligible for

accordance with Sec. 559.11, an expedited treatment under Sec.

operating subsidiary may engage in 516.3(a) of this chapter, and

any activity that you may conduct notify OTS as required by Sec.

directly. You may hold another 559.11, your service corporation

insured depository institution as may engage in the preapproved

an operating subsidiary. activities listed in Sec. 559.4.

You may request OTS approval for

your service corporation to engage

in any other activity reasonably

related to the activities of

financial institutions by filing an

application in accordance with Sec.

516.1 of this chapter.

(ii) If you are subject to standard

treatment under Sec. 516.3(b) of

this chapter, and notify OTS as

required by Sec. 559.11, your

service corporation may engage in

any activity that you may conduct

directly except taking deposits.

You may request OTS approval for

your service corporation to engage

in any other activity reasonably

related to the activities of

financial institutions, including

the activities set forth in Sec.

559.4(b)-(i), by filing an

application in accordance with Sec.

516.1 of this chapter.

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

(f) May the operating subsidiary or (1)(i) An operating subsidiary may

service corporation invest in lower- itself hold an operating

tier entities? subsidiary. Part 559 applies

equally to a lower-tier operating

subsidiary. In applying the

regulations in this part, the

investing operating subsidiary

should substitute ``investing

operating subsidiary'' wherever the

part uses ``you'' or ``savings

association.''

(2) A service corporation may invest

[[Page 66573]]

(ii) An operating subsidiary may

also invest in other types of lower-

tier entities. These entities must

comply with all of the requirements

of this part 559 that apply to

service corporations except for

paragraphs (b)(2) and (d)(2) of

this section.

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

(g) How much may a federal savings (1) There are no limits on the (2) Section 559.5 limits your

association invest? amount you may invest in your aggregate investments in service

operating subsidiaries, either corporations and indicates when

separately or in the aggregate. your investments (both debt and

equity) in lower-tier entities be

aggregated with your investments in

service corporations.

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

(h) Do federal statutes and (1) Unless otherwise specifically (2) (i) If the federal statute or

regulations that apply to the provided by statute, regulation, or regulation specifically refers to

savings association apply? OTS policy, all federal statutes ``service corporation,'' it applies

and regulations apply to operating to all service corporations, even

subsidiaries in the same manner as if you do not control the service

they apply to you. You and your corporation or it is not a GAAP-

operating subsidiary are generally consolidated subsidiary.

consolidated and treated as a unit

for statutory and regulatory

purposes.

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

(i) Do the investment limits that (1) Your assets and those of your (2) Your service corporation's

apply to federal savings operating subsidiary are aggregated assets are not subject to the same

associations (HOLA section 5(c) and when calculating investment investment limitations that apply

part 560 of this chapter) apply? limitations. to you. The investment activities

of your service corporation are

governed by paragraph (e)(2) of

this section and Sec. 559.4.

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

(j) How does the capital regulation (1) Your assets and those of your (2) The capital treatment of a

(part 567 of this chapter) apply? operating subsidiary are service corporation depends upon

consolidated for all capital whether it is an includable

purposes. subsidiary. That determination is

based upon factors set forth in

part 567 of this chapter, including

your percentage ownership of the

service corporation and the

activities in which the service

corporation engages. Both debt and

equity investments in service

corporations that are GAAP-

consolidated subsidiaries are

considered investments in

subsidiaries for purposes of the

capital regulation, regardless of

the authority under which they are

made.

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

(k) How does the loans-to-one- (1) The LTOB regulation does not (2) The LTOB regulation does not

borrower (LTOB) regulation (Sec. apply to loans from you to your apply to loans from you to your

560.93 of this chapter) apply? operating subsidiary or loans from service corporation or from your

your operating subsidiary to you. service corporation to you.

Other loans made by your operating However, Sec. 559.5 imposes

subsidiary are aggregated with your restrictions on the amount of loans

loans for LTOB purposes. you may make to certain service

corporations. Loans made by a

service corporation that you

control to entities other than you

or your subordinate organizations

are aggregated with your loans for

LTOB purposes.

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

[[Page 66574]]

(l) How do the transactions with (1) Section 563.41 of this chapter (2) Section 563.41 of this chapter

affiliates (TWA) regulations (Secs. explains how TWA applies. explains how TWA applies.

563.41 and 563.42 of this chapter) Generally, an operating subsidiary Generally, a service corporation

apply? of a savings association is not that is controlled by a savings

deemed to be an affiliate unless it association is not deemed to be an

is a depository institution or the affiliate of that savings

parent holding company or another association unless it is a

affiliate has control of the depository institution or the

subsidiary outside of the ownership parent holding company or another

chain that runs through the thrift. affiliate has control of the

Transactions that an operating service corporation outside of the

subsidiary engages in with an ownership chain that runs through

affiliate of the thrift are the thrift. Transactions that a

aggregated with those of the service corporation that is

thrift. directly or indirectly controlled

by the savings association engages

in with an affiliate of the savings

association are aggregated with

those of the savings association.

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

(m) How does the Qualified Thrift (1) Under 12 U.S.C. 1467a(m)(5), you (2) Under 12 U.S.C. 1467a(m)(5), you

Lender (QTL) (12 U.S.C. 1467a(m)) may determine whether to may determine whether to

test apply? consolidate the assets of a consolidate the assets of a

particular operating subsidiary for particular service corporation for

purposes of calculating your purposes of calculating your

qualified thrift investments. If qualified thrift investments. If a

the operating subsidiary's assets service corporation's assets are

are not consolidated with yours for not consolidated with yours for

that purpose, your investment in that purpose, your investment in

the operating subsidiary will be the service corporation will be

considered in calculating your considered in calculating your

qualified thrift investments. qualified thrift investments.

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

(n) Does state law apply? (1) State law applies to operating (2) State law applies to service

subsidiaries only to the extent it corporations regardless of whether

applies to you. it applies to you, except where

there is a conflict with federal

law.

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

(o) May OTS conduct examinations? (1) An operating subsidiary is (2) Before you invest in a service

subject to examination by OTS. corporation, you must obtain its

written agreement to permit and to

pay the cost of such examinations

as OTS deems necessary.

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

(p) What must be done to redesignate (1) Before redesignating an (2) Before redesignating a service

an operating subsidiary as a operating subsidiary as a service corporation as an operating

service corporation or a service corporation, you should consult subsidiary, you should consult with

corporation as an operating with the OTS Regional Director for the OTS Regional Director for the

subsidiary? the Region in which your home Region in which your home office is

office is located. You must located. You must maintain adequate

maintain adequate internal records, internal records, available for

available for examination by OTS, examination by OTS, demonstrating

demonstrating that the redesignated that the redesignated operating

service corporation meets all of subsidiary meets all of the

the applicable requirements of this applicable requirements of this

part and that your board of part and that your board of

directors has approved the directors has approved the

redesignation. redesignation.

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

[[Page 66575]]

(q) What are the consequences of (1) If an operating subsidiary, or (2) If a service corporation, or any

failing to comply with the any lower-tier entity in which the lower-tier entity in which the

requirements of this part? operating subsidiary invests service corporation invests

pursuant to paragraph (f)(1) of pursuant to paragraph (f)(2) of

this section fails to meet any of this section, fails to meet any of

the requirements of this section, the requirements of this section,

you must notify OTS. Unless you must notify OTS. Unless

otherwise advised by OTS, if the otherwise advised by OTS, if the

company cannot comply within 90 company cannot comply within 90

days with all of the requirements days with all of the requirements

for either an operating subsidiary for either an operating subsidiary

or a service corporation under this or a service corporation under this

section, or any other investment section, or any other investment

authorized by 12 U.S.C. 1464(c) or authorized by 12 U.S.C. 1464(c) or

part 560 of this chapter, you must part 560 of this chapter, you must

promptly dispose of your promptly dispose of your

investment. investment.

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

Sec. 559.4 What activities are preapproved for service corporations?

This section sets forth the activities that have been preapproved

for service corporations. Section 559.3(e)(2) of this part sets forth

the procedures that govern engaging in a broader scope of activities on

a case-by-case basis. You should read these two sections together to

determine whether you must file a notice with OTS under Sec. 559.11 of

this part, or whether you must file an application under Sec. 516.1 of

this chapter and receive prior written OTS approval in order for your

service corporation to engage in a particular activity. To the extent

permitted by Sec. 559.3(e)(2) of this part, a service corporation may

engage in the following activities:

(a) Any activity that all federal savings associations may conduct

directly, except taking deposits.

(b) Business and professional services. The following services are

preapproved for service corporations only when they are limited to

financial documents or financial clients or are generally finance-

related:

(1) Accounting or internal audit;

(2) Advertising, marketing research and other marketing;

(3) Clerical;

(4) Consulting;

(5) Courier;

(6) Data processing;

(7) Data storage facilities operation and related services;

(8) Office supplies, furniture, and equipment purchasing and

distribution;

(9) Personnel benefit program development or administration;

(10) Printing and selling forms that require Magnetic Ink Character

Recognition (MICR) encoding;

(11) Relocation of personnel;

(12) Research studies and surveys;

(13) Software development and systems integration; and

(14) Remote service unit operation, leasing, ownership or

establishment.

(c) Credit-related activities.

(1) Abstracting;

(2) Acquiring and leasing personal property;

(3) Appraising;

(4) Collection agency;

(5) Credit analysis;

(6) Check or credit card guaranty and verification;

(7) Escrow agent or trustee (under deeds of trust, including

executing and deliverance of conveyances, reconveyances and transfers

of title); and

(8) Loan inspection.

(d) Consumer services.

(1) Financial advice or consulting;

(2) Foreign currency exchange;

(3) Home ownership counseling;

(4) Income tax return preparation;

(5) Postal services;

(6) Stored value instrument sales;

(7) Welfare benefit distribution;

(8) Check printing and related services; and

(9) Remote service unit operation, leasing, ownership, or

establishment.

(e) Real estate related services.

(1) Acquiring real estate for prompt development or subdivision,

for construction of improvements, for resale or leasing to others for

such construction, or for use as manufactured home sites, in accordance

with a prudent program of property development;

(2) Acquiring improved real estate or manufactured homes to be held

for rental or resale, for remodeling, renovating, or demolishing and

rebuilding for sale or rental, or to be used for offices and related

facilities of a stockholder of the service corporation;

(3) Maintaining and managing real estate; and

(4) Real estate brokerage for property owned by a savings

association that owns capital stock of the service corporation, the

service corporation, or a lower-tier entity in which the service

corporation invests.

(f) Securities brokerage, insurance and related services.

(1) Execution of transactions in securities or other nondeposit

investment products on an agency or riskless principal basis solely

upon the order of and for the account of customers, provided that the

service corporation complies with the provisions of Sec. 545.74 of this

chapter;

(2) Investment advice, provided that the service corporation

complies with the provisions of Sec. 545.74 of this chapter;

(3) Insurance brokerage or agency for liability, casualty,

automobile, life, health, accident or title insurance;

(4) Liquidity management;

(5) Issuing notes, bonds, debentures or other obligations or

securities; and

(6) Purchase or sale of coins issued by the U.S. Treasury.

(g) Investments.

(1) Tax-exempt bonds used to finance residential real property for

family units;

(2) Tax-exempt obligations of public housing agencies used to

finance housing projects with rental assistance subsidies;

(3) Small business investment companies licensed by the U.S. Small

Business Administration to invest in small businesses engaged

exclusively in the activities listed in paragraphs (a) through (i) of

this section; and

(4) Investing in savings accounts of an investing thrift.

(h) Community development and charitable activities:

(1) Investments in governmentally insured, guaranteed, subsidized

or otherwise sponsored programs for housing, small farms, or businesses

that are local in character;

(2) Investments that meet the community development needs of, and

[[Page 66576]]

primarily benefit, low- and moderate-income communities;

(3) Investments in low-income housing tax credit projects and

entities authorized by statute (e.g., community development financial

institutions) to promote community, inner city, and community

development purposes; and

(4) Establishing a corporation that is recognized by the Internal

Revenue Service as organized for charitable purposes under 26 U.S.C.

501(c)(3) of the Internal Revenue Code and making a reasonable

contribution to capitalize it, provided that the corporation engages

exclusively in activities designed to promote the well-being of

communities in which the owners of the service corporation operate.

(i) Activities reasonably incident to those listed in paragraphs

(a) through (h) of this section if the service corporation engages in

those activities.

Sec. 559.5 How much may a savings association invest in service

corporations or lower-tier entities?

The amount that a federal savings association (``you'') may invest

in a service corporation or any lower-tier entity depends upon several

factors. These include your total assets, your capital, the purpose of

the investment, and your ownership interest in the service corporation

or entity.

(a) Under section 5(c)(4)(B) of the HOLA, you may invest up to 3%

of your assets in the capital stock, obligations, and other securities

of service corporations. Any investment you make under this paragraph

that would cause your investment, in the aggregate, to exceed 2% of

your assets must serve primarily community, inner city, or community

development purposes. You must designate the investments serving those

purposes, which include:

(1) Investments in governmentally insured, guaranteed, subsidized

or otherwise sponsored programs for housing, small farms, or businesses

that are local in character;

(2) Investments for the preservation or revitalization of either

urban or rural communities;

(3) Investments designed to meet the community development needs

of, and primarily benefit, low- and moderate-income communities; or

(4) Other community, inner city, or community development-related

investments approved by OTS.

(b) In addition to the amounts you may invest under paragraph (a)

of this section, and to the extent that you have authority under other

provisions of section 5(c) of the HOLA and part 560 of this chapter,

and available capacity within any applicable investment limits, you may

make loans to any service corporation and any lower-tier entity,

subject to the following conditions:

(1) You and your GAAP-consolidated subsidiaries may, in the

aggregate, make loans of up to 15% of your capital as defined in

Sec. 567.5(c) of this chapter to each subordinate organization that

does not qualify as a GAAP-consolidated subsidiary. All loans made

under this paragraph (b)(1) may not, in the aggregate, exceed 50% of

your total capital, as defined in Sec. 567.5(c) of this chapter.

(2) The Regional Director may limit the amount of loans to a GAAP-

consolidated subsidiary, or may adjust the limits set forth in

paragraph (b)(1) of this section where safety and soundness

considerations warrant such action.

(c) For purposes of this section, the terms ``loans'' and

``obligations'' include all loans and other debt instruments (except

accounts payable incurred in the ordinary course of business and paid

within 60 days) and all guarantees or take-out commitments of such

loans or debt instruments.

Subpart B--Regulations Applicable to All Savings Associations

Sec. 559.10 How must separate corporate identities be maintained?

(a) Each savings association and subordinate organization thereof

must be operated in a manner that demonstrates to the public that each

maintains a separate corporate existence. Each must operate so that:

(1) Their respective business transactions, accounts, and records

are not intermingled;

(2) Each observes the formalities of their separate corporate

procedures;

(3) Each is adequately financed as a separate unit in light of

normal obligations reasonably foreseeable in a business of its size and

character;

(4) Each is held out to the public as a separate enterprise; and

(5) Unless the parent savings association has guaranteed a loan to

the subordinate organization, all borrowings by the subordinate

organization indicate that the parent is not liable.

(b) OTS regulations that apply both to savings associations and

subordinate organizations shall not be construed as requiring a savings

association and its subordinate organizations to operate as a single

entity.

Sec. 559.11 What notices are required to establish or acquire a new

subsidiary or engage in new activities through an existing subsidiary?

When required by section 18(m) of the Federal Deposit Insurance

Act, a savings association (``you'') must file a notice (``Notice'') in

accordance with Sec. 516.1(c) of this chapter at least 30 days before

establishing or acquiring a subsidiary or engaging in new activities in

a subsidiary. The Notice must contain all of the information the

Federal Deposit Insurance Corporation (FDIC) requires pursuant to 12

CFR 303.13. Providing OTS with a copy of the notice you file with the

FDIC will satisfy this requirement. If OTS notifies you within 30 days

that the Notice presents supervisory concerns, or raises significant

issues of law or policy, you must apply for and receive OTS's prior

written approval in accordance with Sec. 516.1(c) of this chapter

before establishing or acquiring the subsidiary or engaging in new

activities in the subsidiary.

Sec. 559.12 How may a subsidiary of a savings association issue

securities?

(a) A subsidiary may issue, either directly or through a third

party intermediary, any securities that its parent savings association

(``you'') may issue. The subsidiary must not state or imply that the

securities it issues are covered by federal deposit insurance. A

subsidiary may not issue any security the payment, maturity, or

redemption of which may be accelerated upon the condition that you are

insolvent or have been placed into receivership.

(b) You must file a notice with OTS in accordance with Sec. 559.11

of this part at least 30 days before your first issuance of any

securities through an existing subsidiary or in conjunction with

establishing or acquiring a new subsidiary. If OTS notifies you within

30 days that the notice presents supervisory concerns or raises

significant issues of law or policy, you must receive OTS's prior

written approval before issuing securities through your subsidiary.

(c) For as long as any securities are outstanding, you must

maintain all records generated through each securities issuance in the

ordinary course of business, including a copy of any prospectus,

offering circular, or similar document concerning such issuance, and

make such records available for examination by OTS. Such records must

include, but are not limited to:

(1) The amount of your assets or liabilities (including any

guarantees you make with respect to the securities issuance) that have

been transferred or made available to the subsidiary; the percentage

that such amount represents of the current book value of your assets on

an unconsolidated basis; and the current book value of all such assets

of the subsidiary;

[[Page 66577]]

(2) The terms of any guarantee(s) issued by you or any third party;

(3) A description of the securities the subsidiary issued;

(4) The net proceeds from the issuance of securities (or the pro

rata portion of the net proceeds from securities issued through a

jointly owned subsidiary); the gross proceeds of the securities

issuance; and the market value of assets collateralizing the securities

issuance (any assets of the subsidiary, including any guarantees of its

securities issuance you have made);

(5) The interest or dividend rates and yields, or the range

thereof, and the frequency of payments on the subsidiary's securities;

(6) The minimum denomination of the subsidiary's securities; and

(7) Where the subsidiary marketed or intends to market the

securities.

(d) Sales of the subsidiary's securities to retail customers must

comply with Sec. 545.74 of this chapter.

Sec. 559.13 How may a savings association exercise its salvage power

in connection with a service corporation or lower-tier entities?

(a) In accordance with this section, a savings association

(``you'') may exercise your salvage power to make a contribution or a

loan (including a guarantee of a loan made by any other person) to your

service corporation or lower-tier entity (``salvage investment'') that

exceeds the maximum amount otherwise permitted under law or regulation.

You must notify OTS at least 30 days before making such a salvage

investment. This notice must demonstrate that:

(1) The salvage investment protects your interest in the service

corporation or lower-tier entity;

(2) The salvage investment is consistent with safety and soundness;

and

(3) You considered alternatives to the salvage investment and

determined that such alternatives would not adequately satisfy

paragraphs (a)(1) and (a)(2) of this section.

(b) If OTS notifies you within 30 days that the Notice presents

supervisory concerns, or raises significant issues of law or policy,

you must apply for and receive OTS's prior written approval in

accordance with Sec. 516.1(c) of this chapter before making a salvage

investment.

(c) If your service corporation or lower-tier entity is a GAAP-

consolidated subsidiary, your salvage investment under this section

will be considered an investment in a subsidiary for purposes of part

567 of this chapter.

PART 560--LENDING AND INVESTMENT

5. The authority citation for part 560 continues to read as

follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3,

1828, 3803, 3806; 42 U.S.C. 4106.

6. Section 560.30 is revised to read as follows:

Sec. 560.30 General lending and investment powers of federal savings

associations.

Pursuant to section 5(c) of the Home Owners' Loan Act (HOLA), 12

U.S.C. 1464(c), a federal savings association may make, invest in,

purchase, sell, participate in, or otherwise deal in (including

brokerage or warehousing) all loans and investments allowed under

section 5(c) of the HOLA including, without limitation, the following

loans, extensions of credit, and investments, subject to the

limitations indicated and any such terms, conditions, or limitations as

may be prescribed from time to time by the OTS by policy directive,

order, or regulation:

Lending and Investment Powers Chart

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

Statutory investment

limitations

(Endnotes contain

Category HOLA authorization applicable

regulatory

limitations)

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

Bankers' bank stock......... 5(c)(4)(E).......... Same terms as

applicable to

national banks.

Business development credit 5(c)(4)(A).......... The lesser of .5% of

corporations. total outstanding

loans or $250,000.

Commercial loans............ 5(c)(2)(A).......... 20% of total assets,

provided that

amounts in excess

of 10% of total

assets may be used

only for small

business loans.

Commercial paper and 5(c)(2)(D).......... Up to 35% of total

corporate debt securities. assets.1, 2

Community development loans 5(c)(3)(B).......... 5% of total assets,

and equity investments. provided equity

investments do not

exceed 2% of total

assets.3

Construction loans without 5(c)(3)(D).......... In the aggregate,

security. the greater of

total capital or 5%

of total assets.

Consumer loans.............. 5(c)(2)(D).......... Up to 35% of total

assets.1, 4.

Credit card loans or loans (5)(c)(1)(T)........ None.5.

made through credit card

accounts.

Deposits in insured 5(c)(1)(G).......... None.5

depository institutions.

Education loans............. 5(c)(1)(U).......... None.5

Federal government and 5(c)(1)(C), None.5

government-sponsored 5(c)(1)(D),

enterprise securities and 5(c)(1)(E),

instruments. 5(c)(1)(F).

Finance leasing............. 5(c)(1)(B), Based on purpose and

5(c)(2)(A), property financed.6

5(c)(2)(B),

5(c)(2)(D).

Foreign assistance 5(c)(4)(C).......... 1% of total assets.7

investments.

General leasing............. 5(c)(2)(C).......... 10% of assets.6

Home improvement loans...... 5(c)(1)(J).......... None.5

Home (residential) loans 8.. 5(c)(1)(B).......... None.5, 9

HUD-insured or guaranteed 5(c)(1)(O).......... None.5

investments.

Insured loans............... 5(c)(1)(I), None.5

5(c)(1)(K).

Liquidity investments....... 5(c)(1)(M).......... None.5, 10

Loans secured by deposit 5(c)(1)(A).......... None.5, 11

accounts.

Loans to financial 5(c)(1)(L).......... None.5, 12

institutions, brokers, and

dealers.

Manufactured home loans..... 5(c)(1)(J).......... None.5, 13

Mortgage-backed securities.. 5(c)(1)(R).......... None.5

National Housing Partnership 5(c)(1)(N).......... None.5

Corporation and related

partnerships and joint

ventures.

Nonconforming loans......... 5(c)(3)(C).......... 5% of total assets.

[[Page 66578]]

Nonresidential real property 5(c)(2)(B).......... 400% of total

loans. capital.14

Open-end management 5(c)(1)(Q).......... None.5

investment companies \15\.

Service corporations........ 5(c)(4)(B).......... 3% of total assets,

as long as any

amounts in excess

of 2% of total

assets further

community, inner

city, or community

development

purposes.16

Small business investment 5(c)(4)(D).......... 1% of total assets.

companies \17\.

Small-business-related 5(c)(1)(S).......... None.5

securities.

State and local government 5(c)(1)(H).......... None.5, 18

obligations.

State housing corporations.. 5(c)(1)(P).......... None.5, 19

Transaction account loans, 5(c)(1)(A).......... None.5, 20

including overdrafts.

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

Notes:

1 For purposes of determining a Federal savings association's percentage

of assets limitation, investment in commercial paper and corporate

debt securities must be aggregated with the Federal savings

association's investment in consumer loans.

2 A Federal savings association may invest in commercial paper and

corporate debt securities, which includes corporate debt securities

convertible into stock, subject to the provisions of Sec. 560.40.

Amounts in excess of 30% of assets, in the aggregate, may be invested

only in obligations purchased by the association directly from the

original obligor and for which no finder's or referral fees have been

paid.

3 The 2% of assets limitation is a sublimit for investments within the

overall 5% of assets limitation on community development loans and

investments. The qualitative standards for such loans and investments

are set forth in HOLA section 5(c)(3)(B), as explained in an opinion

of the OTS Chief Counsel dated May 10, 1995 (available upon request at

the address set forth in Sec. 516.1(a) of this chapter).

4 Amounts in excess of 30% of assets, in aggregate, may be invested only

in loans made by the association directly to the original obligor and

for which no finder's or referral fees have been paid. A Federal

savings association may include loans to dealers in consumer goods to

finance inventory and floor planning in the total investment made

under this section.

5 While there is no statutory limit on certain categories of loans and

investments, including credit card loans, home improvement loans,

education loans, and deposit account loans, OTS may establish an

individual limit on such loans or investments if the association's

concentration in such loans or investments presents a safety and

soundness concern.

6 A Federal savings association may engage in leasing activities subject

to the provisions of Sec. 560.41.

7 This 1% of assets limitation applies to the aggregate outstanding

investments made under the Foreign Assistance Act and in the capital

of the Inter-American Savings and Loan Bank. Such investments may be

made subject to the provisions of Sec. 560.43.

8 A home (or residential) loan includes loans secured by one-to-four

family dwellings, multi-family residential property and loans secured

by a unit or units of a condominium or housing cooperative.

9 A Federal savings association may make home loans subject to the

provisions of Secs. 560.33, 560.34 and 560.35.

10 The assets qualifying as liquidity investments are described in Sec.

566.1(g) of this chapter. The maturity limitations (except those for

bankers acceptances) of Sec. 566.1(g) of this chapter do not apply

for purposes of this section.

11 Loans secured by savings accounts and other time deposits may be made

without limitation, provided the Federal savings association obtains a

lien on, or a pledge of, such accounts. Such loans may not exceed the

withdrawable amount of the account.

12 A Federal savings association may only invest in these loans if they

are secured by obligations of, or by obligations fully guaranteed as

to principal and interest by, the United States or any of its agencies

or instrumentalities, the borrower is a financial institution insured

by the Federal Deposit Insurance Corporation or is a broker or dealer

registered with the Securities and Exchange Commission, and the market

value of the securities for each loan at least equals the amount of

the loan at the time it is made.

13 If the wheels and axles of the manufactured home have been removed

and it is permanently affixed to a foundation, a loan secured by a

combination of a manufactured home and developed residential lot on

which it sits may be treated as a home loan.

14 Without regard to any limitations of this part, a Federal savings

association may make or invest in the fully insured or guaranteed

portion of nonresidential real estate loans insured or guaranteed by

the Economic Development Administration, the Farmers Home

Administration, or the Small Business Administration. Unguaranteed

portions of guaranteed loans must be aggregated with uninsured loans

when determining an association's compliance with the 400% of capital

limitation for other real estate loans.

15 This authority is limited to investments in open-end management

investment companies that are registered with the Securities and

Exchange Commission under the Investment Company Act of 1940. The

portfolio of the investment company must be restricted by the

company's investment policy (changeable only if authorized by

shareholder vote) solely to investments that a Federal savings

association may, without limitation as to percentage of assets, invest

in, sell, redeem, hold, or otherwise deal in. Separate and apart from

this authority, a Federal savings association may make pass-through

investments to the extent authorized by Sec. 560.32.

16 A Federal savings association may invest in service corporations

subject to the provisions of part 559 of this chapter.

17 A Federal savings association may only invest in small business

investment companies formed pursuant to section 301(d) of the Small

Business Investment Act of 1958.

18 This category includes obligations issued by any state, territory, or

possession of the United States or political subdivision thereof

(including any agency, corporation, or instrumentality of a state or

political subdivision), subject to Sec. 560.42.

19 A Federal savings association may invest in state housing

corporations subject to the provisions of Sec. 560.121.

20 Payments on accounts in excess of the account balance (overdrafts) on

commercial deposit or transaction accounts shall be considered

commercial loans for purposes of determining the association's

percentage of assets limitation.

7. Sections 560.32, 560.36, and 560.37 are added to read as

follows:

Sec. 560.32 Pass-through investments.

(a) A federal savings association (``you'') may make pass-through

investments. A pass-through investment occurs when you invest in an

entity (``company'') that engages only in activities that you may

conduct directly and the investment meets the requirements of this

section. If an investment is authorized under both this section and

some other provision of law, you may designate under which authority or

authorities the investment is made. When making a pass-through

investment, you must comply with all the statutes and regulations that

would apply if you were engaging in the activity directly. For example,

your proportionate share of the company's assets will be aggregated

with the assets you hold directly in calculating investment limits

(e.g., no more than 400% of total capital may be invested in

nonresidential real property loans).

(b) You may make a pass-through investment without prior notice to

OTS if all of the following conditions are met:

(1) You do not invest more than 15% of your total capital in one

company;

(2) The book value of your aggregate pass-through investments does

not

[[Page 66579]]

exceed 50% of your total capital after making the investment;

(3) Your investment would not give you direct or indirect control

of the company;

(4) Your liability is limited to the amount of your investment; and

(5) The company falls into one of the following categories:

(i) A limited partnership;

(ii) An open-end mutual fund;

(iii) A closed-end investment trust;

(iv) A limited liability company; or

(v) An entity in which you are investing primarily to use the

company's services (e.g., data processing).

(c) If you want to make other pass-through investments, you must

provide OTS with 30 days' advance notice. If within that 30-day period

OTS notifies you that an investment presents supervisory, legal, or

safety and soundness concerns, you must file an application with OTS in

accordance with Sec. 516.1 of this chapter and may not make the

investment without first receiving OTS's prior written approval.

Notices under this section are deemed to be applications for purposes

of statutory and regulatory references to ``applications.'' Any

conditions that OTS imposes on any pass-through investment shall be

enforceable as a condition imposed in writing by the OTS in connection

with the granting of a request by a savings association within the

meaning of 12 U.S.C. 1818(b) or 1818(i).

Sec. 560.36 De minimis investments.

A federal savings association may invest in the aggregate up to the

greater of one-fourth of 1% of its total capital or $100,000 in

community development investments of the type permitted for a national

bank under 12 CFR Part 24.

Sec. 560.37 Real estate for office and related facilities.

A federal savings association may invest in real estate (improved

or unimproved) to be used for office and related facilities of the

association, or for such office and related facilities and for rental

or sale, if such investment is made and maintained under a prudent

program of property acquisition to meet the federal savings

association's present needs or its reasonable future needs for office

and related facilities. A federal savings association may not make an

investment that would cause the outstanding book value of all such

investments (including investments under Sec. 559.4(e)(2) of this

chapter) to exceed its total capital.

8. Section 560.93 is amended by revising paragraph (a) to read as

follows:

Sec. 560.93 Lending limitations.

(a) Scope. This section applies to all loans and extensions of

credit to third parties made by a savings association and its

subsidiaries. This section does not apply to loans made by a savings

association or a GAAP-consolidated subsidiary to subordinate

organizations or affiliates of the savings association. The terms

subsidiary, GAAP-consolidated subsidiary, and subordinate organization

have the same meanings as specified in Sec. 559.2 of this chapter. The

term affiliate has the same meaning as specified in Sec. 563.41 of this

chapter.

* * * * *

PART 563--OPERATIONS

9. The authority citation for part 563 continues to read as

follows:

Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,

1817, 1828, 3806; 42 U.S.C. 4106.

Secs. 563.37, 563.38, 563.132 [Removed]

10. Sections 563.37, 563.38, and 563.132 are removed.

11. Section 563.41 is amended by revising paragraph (b)(4) to read

as follows:

Sec. 563.41 Loans and other transactions with affiliates and

subsidiaries.

* * * * *

(b) * * *

(4) The term subsidiary, when used in connection with a savings

association means a company that is controlled by that savings

association within the meaning of part 574 of this chapter;

* * * * *

PART 567--CAPITAL

12. The authority citation for part 567 continues to read as

follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828

(note).

13. Section 567.1 is amended by removing in paragraph (l)(1) the

phrase ``(either directly or through ownership of a subsidiary)'', and

by revising paragraph (dd) to read as follows:

Sec. 567.1 Definitions.

* * * * *

(dd) Subsidiary. The term subsidiary means any corporation,

partnership, business trust, joint venture, association or similar

organization in which a savings association directly or indirectly

holds an ownership interest and the assets of which are consolidated

with those of the savings association for purposes of reporting under

Generally Accepted Accounting Principles (GAAP). Generally, these are

majority-owned subsidiaries.1 This definition does not include

ownership interests that were taken in satisfaction of debts previously

contracted, provided that the reporting association has not held the

interest for more than five years or a longer period approved by the

OTS.

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

\1\ The OTS reserves the right to review a savings

association's investment in a subsidiary on a case-by-case basis. If

the OTS determines that such investment is more appropriately

treated as an equity security or an ownership interest in a

subsidiary, it will make such determination regardless of the

percentage of ownership held by the savings association.

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

* * * * *

PART 571--STATEMENTS OF POLICY

14. The authority citation for part 571 continues to read as

follows:

Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.

Sec. 571.21 [Removed]

15. Section 571.21 is removed.

Dated: December 6, 1996.

By the Office of Thrift Supervision.

Nicolas P. Retsinas,

Director.

[FR Doc. 96-31639 Filed 12-17-96; 8:45 am]

BILLING CODE 6720-01-P