Community Affairs:
Common Part 24 Questions

Direct Versus Indirect Investments in CEDEs

How do the 2008 revisions to the statutory language of 12 U.S.C. 24(Eleventh), providing that national banks may "make investments directly or indirectly, each of which is designed primarily to promote the public welfare, including the welfare of low- and moderate-income communities or families (such as by providing housing, service, or jobs)", apply when a national bank makes an investment (1) directly, or (2) indirectly?

This language, which was enacted in the Housing and Economic Recovery Act¹ effectively restores the public welfare investment test that was in effect prior to enactment of the Financial Services Regulatory Relief Act of 2006 (FSRRA).²

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 primarily promote the public welfare (such as by providing housing, service, or jobs), including the welfare of low- and moderate-income communities or families, or other areas targeted by a governmental entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (the Community Reinvestment Act regulations) as a "qualified investment."

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 primarily promote the public welfare, including the welfare of low- and moderate-income communities or families, or other areas targeted by a governmental entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (the Community Reinvestment Act regulations) as a "qualified investment."

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. Regulations finalized in April 2008 changed the requirement that a bank should make that request in connection with seeking prior OCC approval for making an actual Part 24 investment.

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.

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 is designed primarily to promote the public welfare, including the welfare of low- and moderate-income persons or low- and moderate-income areas, or other areas targeted by a governmental entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (the Community Reinvestment Act regulations) as a "qualified investment." 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.

How did the 2005 changes to the CRA regulations concerning designated disaster areas expand opportunities for "Part 24" public welfare investments (12 CFR Part 24)?

A national bank may make a public welfare investmer under 12 CFR Part 24, if the investment primarily promotes the public welfare, including the welfare of low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a government entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (CRA) as a "qualified investment."

The 2005 revisions to the CRA regulations modified the definition of "community development" to make bank activities to revitalize or stabilize designated disaster areas eligible for CRA consideration. Thus, a national bank may make an investment under 12 CFR Part 24 for any community development activity that revitalizes or stabilizes a designated disaster area.

An activity will be presumed to revitalize or stabilize a designated disaster area if it helps to attract new, or retain existing, businesses or residents and is related to disaster recovery. A "designated disaster area" is a major disaster area designated by the federal government. Investments in recovery-related activities designed to revitalize or stabilize a designated disaster area generally must be made within 36 months after the date of designation. Where there is demonstrable community need to extend the period for recognizing revitalization or stabilization activities in a particular disaster area to assist in long-term recovery efforts, this time period may be extended. For the areas impacted by hurricanes Katrina and Rita, this time period will be extended.

How do the 2005 changes to the CRA regulations concerning distressed nonmetropolitan middle-income geographies expand opportunities for public welfare investments (12 CFR Part 24)?

A national bank may make a public welfare investment under 12 CFR Part 24, if the investment primarily promotes the public welfare including the welfare of low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a government entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (CRA) as a "qualified investment." The 2005 revisions to the CRA regulations modified the definition of "community development" to make bank activities to revitalize or stabilize distressed nonmetropolitan middle-income geographies eligible for CRA consideration. An activity revitalizes or stabilizes a distressed nonmetropolitan middle-income geography if it helps to attract new or retain existing businesses or residents. An activity will be presumed to revitalize or stabilize the area if the activity is consistent with a bona fide government revitalization or stabilization plan. Thus, a national bank may make an investment under 12 CFR Part 24 for any community development activitiy that revitalizes or stabilizes a distressed nonmetropolitan middle-income geography. A listing of such geographies is available on the FFIEC website at http://www.ffiec.gov.

How do the 2005 changes to the CRA regulations concerning underserved nonmetropolitan middle-income geographies expand opportunities for public welfare investments?

A national bank may make a public welfare investment under 12 CFR Part 24, if the investment primarily promotes the public welfare including the welfare of low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a government entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (CRA) as a "qualified investment." The 2005 revisions to the CRA regulations modified the definition of "community development" to make bank activities to revitalize or stabilize underserved nonmetropolitan middle-income geographies eligible for CRA consideration. An activity revitalizes or stabilizes an underserved nonmetropolitan middle-income geography if it helps to meet essential community needs, including the needs of low- or moderate-income individuals. Thus, a national bank may make an investment under 12 CFR Part 24 for any community development activities that revitalizes or stabilizes an underserved nonmetropolitan middle-income geography. A listing of such geographies is available on the FFIEC website at http://www.ffiec.gov.

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 public welfare criteria in section 24.3. These criteria are that the bank's investment is designed primarily to promote the public welfare including the welfare of low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a governmental entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (the Community Reinvestment Act regulations) as a "qualified investment." 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.

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 is designed primarily to benefit low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a government entity for redevelopment, or the investment would receive consideration under 12 CFR 25.23 (CRA) as a "qualified investment." A 1992 amendment to the Community Reinvestment Act (CRA) authorizes the banking agencies, when evaluating a bank's CRA performance, to consider capital investments undertaken by the institution in cooperation with minority- and women-owned financial institutions provided that these activities help meet the credit needs of local communities in which such institutions are chartered. Consequently, national banks may make investments under 12 CFR Part 24 in minority- and women-owned banks and thrifts that serve the local communities in which they are chartered. 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.