Community Affairs:
Common Part 24 Questions
Direct Versus Indirect Investments in CEDEs
How do the 2006 revisions to the statutory language of 12 U.S.C. 24(Eleventh), "To make investments, directly or indirectly, each of which promotes the public welfare by benefiting primarily low- and moderate-income communities or families," apply when a national bank makes an investment (1) directly, or (2) indirectly?
When a national bank makes an investment directly into a project or makes an investment into a subsidiary CEDE, which in turn invests funds in a project, each project in which the bank or the subsidiary CEDE invests must promote the public welfare by benefiting primarily low- and moderate-income communities or families.
If a bank does not control the CEDE in which it invests, the CEDE will not be considered a subsidiary for purposes of 12 USC 24 (Eleventh). When a national bank makes an investment in a non-subsidiary CEDE, the CEDE's activities, in the aggregate (as opposed to each project), must promote the public welfare by benefiting primarily low- and moderate-income communities or families.
After-the-Fact Notification
What process must a bank follow
if it wants to provide after-the-fact notices to the OCC rather than prior
approval requests for future investments of more than 5 percent of capital and
surplus?
An eligible bank may make most Part 24 investments
without prior notification to, or approval by the OCC if the bank follows the
after-the-fact notice procedures described under section 24.5(a). Generally, if
an investment meets Part 24's public welfare, limited liability, and investment
limit requirements, an eligible bank may make the investment and notify the OCC
within 10 days after making the investment.
However, the investment limit requirements do
not allow a national bank's aggregate outstanding Part 24 investments to exceed
5 percent of its capital and surplus without prior written approval.
When a bank's aggregate outstanding Part 24
investments approach 5 percent of its capital and surplus, if the bank is at
least adequately capitalized, it may seek OCC permission to use the
after-the-fact notice procedures for investments above the 5 percent investment
limit. The bank should make that
request in connection with seeking prior OCC approval for making an actual Part
24 investment. That means the bank
should submit an investment proposal seeking approval of a Part 24 investment
using the procedures outlined in section 24.5(b). The bank also may request OCC approval at that time to make
future investments, up to a certain percentage or dollar amount of more than 5
percent of its capital and surplus (but not more than 15 percent), using the
after-the-fact notice procedures. The
bank's request should be submitted to the Director, Community Development
Division, Office of the Comptroller of the Currency, Washington, DC 20219.
The OCC's consideration of the bank's request to use
the after-the-fact notice procedures for future investments exceeding 5 percent
of capital and surplus will weigh whether the bank is at least adequately
capitalized and whether the higher amount will not pose significant risk to the
deposit insurance fund. In no event may the
bank's aggregate outstanding Part 24 investments exceed 15 percent of its
capital and surplus.
Minority- and Women-Owned Banks and Thrifts
What are OCC's guidelines for public welfare investments in minority- and women-owned banks and thrifts under 12 CFR Part 24?
A national bank may make a public welfare investment under 12 CFR Part 24, if the investment primarily benefits low- and moderate-income individuals or low- and moderate-income areas. National banks may make investments under 12 CFR Part 24 in minority- and women-owned banks and thrifts that primarily serve low- and moderate-individuals or low- and moderate-income areas. National banks may also make public welfare investments in minority- and women-owned banks and thrifts that are CDFI Fund certified Community Development Financial Institutions or are community development focus national banks chartered by the OCC.
Legal Authority for Community Development Investments
Must a bank use the Part 24 investment authority for making all types of community development investments?
Part 24 permits a national bank to
make an investment if the investment primarily benefits low- and
moderate-income persons or low- and moderate-income areas. A
typical use of the Part 24 investment authority is for a bank's equity
investment in a limited partnership or fund that develops and operates
affordable housing qualifying for federal low-income housing tax credits. Other examples of qualifying public welfare
investments are found in section 24.6.
Similarly, under 12 USC 24(Eighth), in certain circumstances,
a national bank may support community and economic development activities by
contributing to community funds, nonprofit community-based organizations and
intermediaries, foundations, or other "charitable, philanthropic, or benevolent
instrumentalities conducive to public welfare." In addition, a bank may make
loans or debt investments that support development activities or purchase
community development municipal bonds consistent with the requirements and
limitations of 12 USC 24(Seventh).
By using these other investment authorities where
appropriate, a national bank may be able to preserve its limited Part 24
investment authority.
Legal Authority for Investments in Subsidiary Community Development Entities
and New Markets Tax Credits
The OCC determined, in the 2003 revisions to 12 CFR 24 (Part
24), that a national bank investment in a new markets tax credit community
development entity qualifies as public welfare investment. Since then, several national banks have
asked whether all investments in community development entities (CDE) must use
the Part 24 investment authority and be subject to the capital and surplus
requirements. The short answer is:
No. Below are some
questions and guidance to help you better determine when a bank can use
another authority.
If a CDE limits its activities to making loans, can a national bank invest in a CDE pursuant to other legal authority?
Yes. A national bank may invest in a CDE either as an operating subsidiary or as a
non-controlling equity investment if the requirements in 12 CFR 5.34 or 5.36,
respectively, are satisfied. Such investments would not be subject to the limitations of Part 24.
What exactly is an operating subsidiary?
An operating subsidiary is a separate corporation,
LLC, or similar entity, in which a national bank maintains more than a 50
percent voting or similar type of controlling interest, or otherwise controls
the subsidiary and no other party controls more than 50 percent of the voting
(or similar type of controlling) interest of the subsidiary. An operating subsidiary may engage in
activities that are part of, or incidental to, the business of banking,
including the making of loans or other extensions of credit. Operating
subsidiaries are governed by 12 CFR 5.34.
Must a bank submit an application or notice to the OCC to establish an operating subsidiary?
Yes, a bank that intends to acquire
or establish an operating subsidiary usually must submit an application or
notice to the OCC. Well-capitalized and
well-managed banks may file under the notice process for the acquisition or
establishment of an operating subsidiary that will engage in only "eligible
activities." The eligible activities,
which are listed in 12 CFR 5.34(e)(5)(v), include making loans or other
extensions of credit. If a bank is not
well-capitalized and well-managed (or if the proposed activities are not
eligible activities), the bank must follow the standard application process for
all activities. See "Investment in
Subsidiaries and Equities," Comptroller's Licensing Manual, for detailed
guidance on the operating subsidiary filing procedures.
Pursuant to Part 5, may a national bank own, either
directly or through an operating subsidiary, a non-controlling interest in a
CDE that engages only in eligible activities?
Yes, the OCC permits national banks to own, either
directly or through an operating subsidiary, a non-controlling interest in such
a CDE. The CDE may be a corporation,
limited partnership, LLC, or similar entity.
Twelve CFR 5.36 provides a notice procedure for well-capitalized and
well-managed banks to make certain types of non-controlling investments,
including non-controlling investments in entities engaged in the eligible
activities listed in 12 CFR 5.34(e)(5)(v).
For further details on the information
that must be included in a non-controlling investment notice, see 12 CFR
5.36.
Maintaining Investment Files
What types of information should a bank maintain in its
files about its Part 24 investments?
Part 24 requires, under section 24.7(b), that a national bank must maintain in its files information adequate to demonstrate that its Part 24 investments meet the public welfare standard set out in section 24.3, and that the bank is otherwise
in compliance with Part 24. The bank's file on each Part 24 investment should be readily accessible
for examination. If the OCC imposes one
or more conditions on its approval of a Part 24 investment, the bank's file or
documentation should indicate how the bank has complied with those conditions.
For
Part 24's public welfare requirement, the documentation should indicate that
the investment satisfies at least one of the two public welfare criteria in
section 24.3. These criteria are that
the bank's investment primarily benefits low- and moderate-income persons or low-
and moderate-income areas.
Information describing activities funded by the bank's investment and
indicating how they are consistent with the activities described in the bank's
after-the-fact notification or prior approval request and any supplemental
materials or clarifications may help to establish that the public welfare
requirement has been met.
For Part 24's investment limit requirements, a bank should document the dollar amount of the
bank's investment, which should be consistent with the information provided in
connection with the bank's after-the-fact notice or prior approval request and
any supplemental materials or clarifications. Documentation about the nature and legal structure of the investment
should demonstrate that the investment does not expose
the bank to unlimited liability.
A bank also may consider implementing a system for tracking its Part 24 investments
(including outstanding commitments) with due attention to investments that have
been changed, completed, sold, or otherwise divested, so as to know at any
point in time the aggregate outstanding amount of Part 24 investments and the
percentage of capital and surplus represented by those investments. A tracking system also would enable a bank
to notify the OCC of changes in the nature or amount of its Part 24
investments, if necessary.
As a general matter, files also should contain copies of all correspondence with
the OCC, including correspondence pertaining to particular investments and to
the percentage of capital and surplus that the bank may invest under Part 24. For example, if the bank's aggregate Part 24
investments are greater than 5 percent of its capital and surplus, the bank's
file should contain the OCC's letter that permits the bank to exceed the 5
percent limit.
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