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4000 - Advisory Opinions
Part 362: Whether a Community Development Project Is a
"Permissible" Investment for a State Bank
FDIC--94--51
October 21, 1994
Cottrell L. Webster, Regional Director
Subject: Community Development Project Partnership
We are in receipt of your letter dated September 29, 1994, in which
you have described your preliminary plans to establish a community
development project ("Joint CD-Project") for the construction of
a new 100,000 square foot building in an industrial park located in a
governmental designated redevelopment area. You state that the building
would attract new, small businesses and create jobs for low- to
moderate-income individuals. You also state that the community
development needs addressed by this proposal have not been satisfied by
the private market. You have asked us to determine if this is a
"permissible" investment for a state bank; and, if not, what
additional information would be needed to file an application pursuant
to Part 362.
As you know, under section 24 of the Federal Deposit Insurance Act,
12 U.S.C. § 1831a, and Part
362 of the FDIC's Rules and Regulations,
12 C.F.R. Part 362, a state
bank may not make any equity investments of a type or in an amount that
are not permissible for national banks, with few exceptions. Under
section 24 (eleventh) of the National Bank Act, 12 U.S.C. § 24
(11th), a national bank may make investments designed primarily to
promote the public welfare. Based on this national bank investment
authority, the FDIC's Legal Division has determined that a state bank's
investment in a community development corporation/project is a
permissible activity for purposes of Part 362, subject to the OCC
regulations implementing 12 U.S.C. § 24 (11th) contained in 12 C.F.R.
Part 24.
Specifically, the FDIC will permit a state bank to engage in a
particular community development project if the particular investment
is on the list of previously approved investments maintained by the
OCC, or if a particular investment is identical in all material
respects to an investment that appears on the OCC's approved list. We
have determined that the Joint CD-Project you have proposed is similar
to one approved by the OCC in February 1982 and as such would be a
permissible equity investment subject to the considerations discussed
below.
The OCC regulations identify several types of community development
arrangements. The type of arrangement you ultimately decide upon will
affect the extent and applicability of the requirements discussed
further below. For purposes of this discussion, we have assumed that
the limited scope of the proposed Joint CD-Project you have described
suggests that you will be engaging in a "community development
project", as defined in the OCC's regulations. In relevant part, the
definition of "community development project," 12 C.F.R.
§ 24.2(c), provides the following:
A specific project in a particular location or area, including
. . . a governmental-designated redevelopment area . . . whose
purpose is to foster economic improvement of that area, and other
community development initiatives considered permitted public
welfare investments under § 24.4(a). A CD-project investment
funds the development or renovation of one or more specified
residential or commercial properties in a manner consistent with
community and government revitalization plans. (emphasis added)
The Joint CD-Project you have proposed will be considered a
community development project if it satisfies the following four
criteria established in the OCC's definition of permitted public
welfare investment.
The first criterion is that the Joint CD-Project primarily benefit
low- and moderate-income persons and families or small businesses,
including minority-owned small businesses. 12 C.F.R. § 24.4. While
you have expressed your interest in providing jobs for low- to
moderate-income persons, you have not provided a plan as to how this
objective will be accomplished. Your plan should articulate a detailed
scheme that would ensure the achievement of your objectives.
{{2-28-95 p.4906}}
Second, the Joint CD-Project must address community development
needs that have not been met by the private market in one or more
communities served by your banks. You stated in your letter that
President of Company, with whom you plan to engage in the Joint
CD-Project, was unable to secure the equity investment from local
individuals necessary to obtain bank financing. You also stated that
the Town/County, Industrial Development Board was unable to locate
qualified individuals to participate in the development project.
Subject to the continued absence of interest by the private market to
develop the Town/County industrial park, it appears that, in fact, you
may have identified a community development need that has not been met
by the private market.
Third, you must demonstrate that there is nonbank community
involvement in the Joint CD-Project indicating that the affected
primary beneficiaries and representatives of local (or state)
government have endorsed and demonstrated support for the Joint
CD-Project. Based on your preliminary plans, we are unable to determine
the extent of community-based or government support for the Joint
CD-Project.
Fourth, the profits, dividends, tax credits and other distributions
from the Joint CD-Project received by your banks must be devoted to
activities that primarily promote the public welfare. You have not
indicated whether you anticipate any profits, tax credits or other
distributions or how you intend to utilize such gains.
In the event that you determine you cannot satisfy all of the above
requirements, you may still be able to proceed with this activity,
subject to express approval by the FDIC under section 24(a) of the
Federal Deposit Insurance Act and 12 C.F.R. Part 362. To obtain such
approval, you must file an application with the FDIC pursuant to
12 C.F.R. § 362.4.
We hope that we have successfully raised some issues for your
consideration as you proceed in the planning of the Joint CD-Project.
If you have any further questions, please do not hesitate to contact
us.
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