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Federal R eserve Bank OF DALLAS ROBERT D. M C T E E R , J R . P R E S ID E N T DALLAS, TEXAS A N D C H IE F E X E C U T I V E O F F I C E R January 18, 1995 75265-5906 Notice 95-04 TO: The Chief Executive Officer of each m em ber bank and others concerned in the Eleventh Federal Reserve District SUBJECT Final Amendments to Regulation H (Membership of State Banking Institutions in the Federal Reserve System) and Regulation Y (Bank Holding Company and Change in Bank Control) DETAILS The Board of Governors of the Federal Reserve System has issued final amendments to Regulation H (Membership of State Banking Institutions in the Federal Reserve System) regarding public welfare investments by state m em ber banks, and a corresponding Regulation Y (Bank Holding Company and Change in Bank Control) interpretation for bank holding companies. The final amendments, which became effective January 9, 1995, perm it state mem ber banks to make certain public welfare investments without specific Board approval and other public welfare investments with specific approval. The amendments also address the procedural aspects of these investments. ATTACHMENT A copy of the Board’s notice as it appears on pages 63706-14, Vol. 59, No. 236, of the Federal Register dated Decem ber 9, 1994, is attached. MORE INFORMATION For more information, please contact Michael Johnson at (214) 922-6081. For additional copies of this Bank’s notice, please contact the Public Affairs Departm ent at (214) 922-5254. Sincerely yours, For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333 -4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 63706 Federal Register / Vol. 59, No. 236 / Friday, December 9, 1994 / Rules and Regulations Final rule. 12 CFR Part 208 ACTION: [R egulation H; D o c k e t No. R -0838] SUMMARY: Membership of State Banking Institutions in the Federal Reserve System AGENCY: Board of Governors of the Federal Reserve System. T h e Board is amending its Regulation H to implement a provision of the Depository Institutions Disaster Relief Act of 1992 that authorizes state member banks to make investments designed primarily to promote the public welfare to the extent permissible under state law and subject to regulation Federal Register / VoL 59, No. 236 / Friday, December a, 1994 / Rules and Regulations by the Board. The amendment would permit state member banks to make certain public welfare investments without prior approval and other public welfare investments with specific Board approval. The amendment also addresses the procedural aspects of these investments. EFFECTIVE DATE: January 9, 1995. FOR FURTHER INFORMATION CONTACT: Stephanie Martin, Senior Attorney (202— 452— 3198), Legal Division; Sandra Braunstein, Manager for Community Affairs, (202— 452-3378), Division of Consumer and Community Affairs; Larry Cunningham, Supervisory Financial Analyst, Division of Banking Supervision and Regulation (202— 4522701); for users of the Telecommunications Device for the Deaf (TDD) only, Dorothea Thompson (202452-3544); Board of Governors of the Federal Reserve System, Washington, DC 20551. SUPPLEMENTARY INFORMATION*. The Depository Institutions Disaster Relief Act of 19921 amended the Federal Reserve A ct2 to loosen the restriction on the ability of state memher banks to purchase, sell, underwrite, and hold investment securities. The amendment allows state member hanks to make investments that are designed primarily to promote the public welfare. The investment must not violate state law or expose the bank to unlim ited liability. The aggregate of the bank’s public welfare investments most not exceed the sum of five percent of the bank’s capital stock actually paid in and unimpaired and five percent of its unimpaired surplus fund. The Board may waive this limit by order, on a caseby-case basis, and permit a bank to make investments in an amount not exceeding the sum of ten percent of the capital stock actually paid in and unimpaired and ten percent of the unimpaired surpfus fund of the bank. Finally, the Board must limit a bank’s investments in any one project. In the past, the Board nas dealt w ith requests by state member banks to make public welfare investments o n a case-bycase basis. To reflect the recent Federal Reserve Act amendment and to facilitate public welfare investments by state member banks, the Board is amending Regulation H (12 CFR Part 208) by adding a new section entitled Community Development and Public Welfare Investments. This amendment will permit state member banks to make certain public welfare investments without prior approval. ' Pub. L. 102— ,106 485 Summary of Final Rule The final rule identifies classes of public welfare investments that do not require prior approval, leaving less common investments and investments of more than five percent of a bank’s capital stock and surplus subject to case-by-case review. Under the final rule, a state member bank may make an investment, without prior approval, if the investment previously has been determined to be a public welfare investment by the Beard or the Comptroller of the Currency or is an investment in a community development financial institution as defined in the Community Development Banking and Financial Institutions Act of 1994.3 In addition, the rule allows state member banks to invest without prior approval in an entity established solely to engage in one or more of the following activities: low- and moderateincome housing; nonresidential realestate development in a low- or moderate-income area that is targeted towards low- and moderate-income persons; small business development in a low- or moderate-income area; jab training o r placement for low- and moderate-income persons; job creation in a low- or moderate-income area for low- and moderate-income persons; and technical assistance and credit counseling to benefit community development. The final rale uses the Department of Housing and Urban Development’s (HUD’s) Chapter 69 Community Development definition of low- and moderate-income persons and the Small Business Administration’s definition of small business. Low- or moderateincome area is defined as an area in which the median family income is less than eighty percent of the median family income of the Metropolitan Statistical Area, or, for nan-metropolitan areas, the state. Under the final rule, the investment must not violate state law or expose the bank to unlimited liability. The rule limits aggregate public welfare investments w ithout prior approval to up to five percent of the capital stock and surplus of the state member bank and limits any single investment without prior approval to not more than two percent of a bank’s capital stock and surplus. In addition, to make public welfare investments without prior approval, a state member bank must be at least adequately capitalized and rated a composite CAMEL " I ” or “2 “ and at least “satisfactory” in its last consumer compliance examination. In addition. 277T, 2774, sectio n Gfb). 1 Section a . p v a g n p h 23 (12 U.S.C. 338a). 3 T itle I o f P»t>. L. 1 93-325, 106 S » t. 2160, sec t in n 103<3k. 63707 the bank must not be subject to any written agreement, cease and desist order, capital directive, or prompt corrective action directive issued by the Board or a Federal Reserve Bank acting under delegated authority. A state member bank must receive Board approval before making an investment that falls outside of the rule’s % parameters. In no event may aggregate public welfare investments exceed ten percent of the bank’s capital stock and surplus. Within 30 days after making a public welfare investment w ithout prior approval, a state member bank must advise its Reserve Bank of the amount of the investment and the identity of the entity in which the investment is made. If a bank has a preexisting public welfare investment on the rule’s effective date that would not require prior approval under the rule, the bank must notify its Reserve Bank of the investment within sixty days after the effective date of the rule. For other preexisting public welfare investments, the bank must apply to the Board for approval of the investment within one year after the rule’s effective date. If a public welfare investment ceases to meet the statutory requirements o r any requirements established by the Board in granting approval, the bank must divest itself of the investment to the extent that the investment ceases to meet those requirements. This divestiture is governed by the same requirements as divestitures of interests acquired by a lending subsidiary of a bank holding company or a bank _ holding company itself in satisfaction of a debt previously contracted. (See 12 CFR § 225.140.) Divestiture is not required if the investment ceases to meet the non-statutory requirements concerning capital, examination ratings, and enforcement actions. Summary of Comments and Sectian-bySection Analysis The Board proposed amendments to Regulation H regarding public welfare investments by state member banks in May 1994 (59 FR 27247, May 26,1994). The Board received nine public comments on the proposed rule: four from trade associations, three from . community development organizations, and tw o from bank holding companies. The public comments and the Board's responses to th e comments are discussed in the section-by-section analysis below. Section 20H.21(aKl) Definition o f low- and moderateincom e area. The Board proposed to define "low- and moderate-income 63708 Federal Register / Vol. 59, No. 236 / Friday, December 9, 1994 / Rules and Regulations area” as an area in which the median family income is less than eighty percent of the median family income of the Metropolitan Statistical Area, or, for non-metropolitan areas, the state. One commenter stated that “low- and moderate-income area” should include disadvantaged areas designated by statute as requiring special government assistance tnat might not qualify under the proposed definition. The Board has addressed the concern that the proposed rule’s coverage was too narrow by amending § 208.21(b)(1) to broaden the universe of investments that are permissible without prior approval. (This am endment is discussed below.) The Board has adopted the definition as proposed. Section 208.21(a)(2) Definition o f low- and moderateincom e person. The proposed rule’s definition of “low- and moderateincome person” incorporated the definition in Chapter 69 of the HUD statute on community development. One commenter supported use of the HUD standard of 80% of median income in defining the upper limit for qualifying investments. The Board has adopted the proposed definition, with a minor citation correction. Section 208.21(a)(3) Definition o f sm all business. The Board proposed to incorporate the definition of “small business” as it applies to entities eligible for financial or other assistance under the Small Business Administration’s Small Business Investment Company and Development Company programs. The Board received no public comments on this definition and has adopted it as proposed. Section 208.21(b)(l)(i)-(iii) Investm ents not requiring prior approval. The proposed rule provided that state member banks could make an investment w ithout prior approval if the Board has determined the investment is a public welfare investment or if the entity in which the bank invests engages solely in one or more specified community development activities. One commenter stated that the proposed standards were narrower than the Federal Reserve Act’s requirements and could exclude public-purpose projects and mixed use projects where low- and moderate-income residents are only some of the project’s beneficiaries, particularly in rural areas where lowand moderate-income families are not concentrated. In the final rule, the Board has broadened the scope of investments that are permissible w ithout prior approval. Specifically, a state member bank may invest in an entity if the Comptroller of the Currency (OCC) has determined, by order or regulation, that investment in that entity by a national bank is a public welfare investment under section 5136 of the Revised Statutes (12 U.S.C. 24). This provision will provide greater consistency in investments that are permissible for state member banks and national banks and will eliminate the need in many cases for determinations by two regulatory agencies. In addition, under the final rule a state member bank may, without prior approval, invest in a community development financial institution as defined in section 103(5) of the Community Development Banking and Financial Institutions Act of 1994. Congress has found that community development financial institutions play an important role in promoting economic revitalization and development in troubled communities and has established a special fund to invest in and assist these institutions. Therefore, the Board believes that investment in community development financial institutions by state member banks should be considered public welfare investments. Additionally, under § 208.21(d), the Board could make a general determination for investments in entities engaged in a particular activity. For example, if the Board determined that an investment in an entity engaged in development activities in a federallyspecified enterprise zone was a permissible public welfare investment, it might also determine that an investment in any similar entity engaged in similar activities would not require prior approval. Two commenters argued that the proposed restrictions were too broad. These commenters stated that the prior approval exem ption should be provided only for those investments that address the needs of low- and moderate-income persons and com m unities in ways not readily available through the private market. These commenters suggested that the Board add criteria similar to those in the OCC’s rules on public welfare investments. These commenters also suggested that a qualifying public welfare investment should be required to include nonbank community involvement to ensure that low- and moderate-income community residents will benefit from the investment. Generally, the ability to obtain funds in the private market is a matter of price rather than access. The rate at which funding in the private market would be prohibitive would vary with each project and would be difficult to specify in a rule of general application. In addition, the Board believes that the community development projects described by the rule will usually have some form of community support. The Board believes that any benefit in requiring a showing of non-bank community involvement in a project would be outweighed by the additional regulatory burden involved. One commenter requested that the Board clarify that investments may be made in either non-profit o r for-profit community development projects without prior approval. The final rule does not distinguish between non-profit and for-profit investments. Eithsr type of investment is permissible as long as it meets the rule’s requirements. Section 208.21(b)(l)(iv) The proposed rule provided that a state member bank could invest without prior approval in an entity that engages solely in one or more specified community development activities. Engaged solely. Two commenters stated that requiring an entity to engage solely in one of the specified activities is too restrictive. The commenters noted that many companies invest in community development but are diverse and multi-functional. One commenter suggested that the Board substitute “primarily” for “solely.” The Board believes that the term “primarily,” which could be interpreted to mean 51 percent or even lower, is not narrow enough for purposes of investments without prior approval. If a state member bank wishes to invest in an entity that does not engage solely in the listed activities, it may ask for a Board determination that the investment is a public welfare investment. The Board has retained the “solely” language in the final rule. Where the Board used the term “primarily” in the proposed rule, it intended to cover those projects targeted towards low- and moderate-income persons. The Board has substituted the phrase “targeted tow ards” for “ primarily” in the final rule (§ 208.21(b)(l)(iv) (B) and (D)). Indirectly engaged. One commenter asked that the Board clarify whether the rule covers investment in a firm that engages in enum erated activities through a wholly-owned subsidiary. The Board believes that investment in an entity that engaged solely in the listed activities through one or more subsidiaries would be permissible. The Board has revised the final rule (§ 208.21(b)(l)(iv)) to clarify this point. Lending activity. The Board has revised the rule to allow investments without prior approval in entities Federal Register / Vol. 59, No. 236 / Friday, December 9, 1994 / Rules and Regulations engaged solely in public welfare lending activities. Section 208.21(b)(l)(iv)(A) Investm ents in low- and moderateincom e housing. The Board proposed to allow investment without prior approval in entities that are engaged in certain activities related to low- and moderate-income housing. The Board specifically requested comment on w hether low- and moderate-income housing should be defined as housing where a majority of the units are occupied by low- and moderate-income persons (as proposed) or whether the definition should be based on other federal programs, such as the lowincome housing credit in section 42 of the Internal Revenue Code. The Board received six public comments on this issue. Three commenters supported the test proposed ~by the Board. One of thesecommenters stated that section 42 of the Internal Revenue Code should apply only if a corporation makes an investment in a housing project specifically to benefit from a lowincome housing tax credit. Another of these commenters suggested that the ru le’s definition of low- and moderateincome housing reflect the current HUD definition, which stratifies the definition further to include very low income designations. One commenter stated that requiring a majority of residential units to be occupied by low- and moderate-income persons would tend to segregate the poor from people who could help them prosper. This commenter suggested that the test should be satisfied by any housing “occupied by low- to moderateincome persons,” or if necessary, including a low occupation threshold amount such as 15 percent. Two commenters suggested that a qualifying investment should meet the “majority of units” requirement as well as a requirement that either (1) at least 20 percent of the units be occupied by individuals whose incomes do not exceed 50 percent of area median income, or (2) at least 40 percent of the units be occupied by individuals whose incomes do not exceed 60 percent of the area median income, adjusted for family size. The commenters believed that the additional restriction (which is based on the definition of “low-income housing project” in the Internal Revenue Code) w ould insure that qualifying investments would provide a minimum level of benefit to low-income persons. The Board believes that the additional restrictions on the test for low- or moderate-income housing would not provide sufficient flexibility in the final rule. However, the Board believes that tax credits could provide a powerful incentive for banks to invest in lowincome housing. Therefore, the Board has adopted a revised version of the low- and moderate-income housing provision that would allow investment in residential property in which a majority of the units are occupied by low- or moderate-income persons or that meets the definition of a qualified lowincome building under section 42 of the Internal Revenue Code. Section 208.21(b)(l)(iv)(B) Investm ents in nonresidential real property. The Board proposed to allow investment w ithout prior approval in entities that are engaged in certain activities related to nonresidential real property or other assets located in a low- or moderate-income area and to be used primarily by low- and moderateincome persons. Two commenters strongly supported the inclusion of this category. Other than the revision to the term “primarily,” the Board has adopted this provision as proposed. Section 208.21(b)(l)(iv)(C) Sm all businesses in low- or moderateincom e area. The Board proposed to allow investment without prior approval in entities that invest in small businesses located in a low- or moderate-income area to stimulate economic development. Two commenters suggested that the Board add emphasis on minority small businesses, which are an especially underserved segment of the small business community. The Board believes it would be difficult to determine what criteria to use to identify disadvantaged small businesses and has not adopted this suggestion. One commenter stated that the Board should permit investments in all small businesses, as such investments would stimulate economic development regardless of whether the businesses are located in low- or moderate-income areas. The expansion of the types of investment permissible w ithout prior approval (§ 208.21(b)(1) (ii) and (iii)) should help address the concerns raised by this commenter. The Board has adopted the provision as proposed. Section 208.21(b)(l)(iv) (D) and (E) Job training and em ploym ent opportunities. The Board proposed to allow investment without prior approval in an entity that (i) invests in, develops, or otherwise assists job training or placement facilities or programs that will be used primarily by low- and moderate-income persons or (ii) invests in an entity located in a low- 63709 or moderate-income area if that entity creates long-term employment opportunities, a majority of which will be held by low- and moderate-income persons. The Board received no public comments on these provisions. Other than the revision to the term “primarily,” the Board has adopted these provisions as proposed. Section 208.21(b)(l)(iv)(F) Investm ents in credit counseling. The Board proposed to allow investment w ithout prior approval in entities that provide technical assistance, credit counseling, research, and program development to low- and moderateincome persons, small businesses, or nonprofit corporations to help achieve community development. Two commenters strongly supported the inclusion of this category. The Board has adopted this provision as proposed. Section 208.21(b)(2) Permitted by state law. The Board proposed to allow investments without prior approval only if the investment is permitted by state law. The Board received no public comments on this provision and has adopted it as proposed. Section 208.21(b)(3) Lim ited liability. The Board proposed to allow investments without prior approval only if the investment will not expose the bank to liability beyond the am ount of the investment. The Board received no public comments on this provision and has adopted it as proposed. This provision would preclude a state member bank from acting as a general partner. A general partner is normally liable for all of the debts of the partnership, which could be greater than the partner’s investment. Section 208.21(b) (4) and (5) Percentage o f capital limitation. The Board proposed to allow investments w ithout prior approval only if the investment does not exceed the sum of two percent of the bank’s capital stock and surplus and if the aggregate all such investments of the bank does not exceed the sum of five percent of its capital stock and surplus. The Board received no comments on this provision and has adopted it as proposed. Definition o f capital. The Board proposed to define capital stock and surplus as it is defined in a Board interpretation on state member bank undivided profits (12 CFR § 250.162). One commenter suggested that the Board define capital and surplus as total Tier 1 and Tier 2 capital, plus that balance of a bank’s allowance for loans 63710 Federal Register / Vol. 59, No. 236 / Friday, December 9, 1994 / Rules and Regulations and lease losses not included in Tier 1 and Tier 2 capital. The commenter stated that this information can be easily gleaned from call report, would ease compliance, and would be consistent with the OCC’s proposed definition of capital and surplus for purposes of lending limits. The Board believes that the capital definition suggested by the commenter is broader than anticipated by the “capital and surplus” language of the statute. For many years, rules establishing limitations on the activities of state member banks in terms of a bank’s capital structure have used a well-established definition of capital stock and surplus that includes undivided profits plus allowance for loan and lease losses. As these items are readily ascertained from the Schedule RC Balance Sheet report (total equity capital (line 28); allowance for loan and lease losses (line 4b), the Board has adopted the definition of capital and surplus as proposed. Section 208.21(b) (6)-(8) Requirements regarding bank condition. The Board proposed to allow investments without prior approval only if the bank is well capitalized or adequately capitalized, received a composite CAMEL rating of “ 1” or “2” as of its most recent examination, and is not subject to any written agreement, cease and desist order, capital directive, or prompt corrective action directive issued by the Board or a Federal Reserve Bank. One commenter stated that CAMEL 3rated institutions do not pose the same risks to safety and soundness as 4- and 5-rated institutions. The commenter suggested that an improving 3-rated institution with adequate capital should be able to request a waiver from the Board to forego the application process for future public welfare projects (consistent w ith the OCC’s public welfare investment rule). The Board believes, however, that-it would need to review a 3-rated bank’s status upon each public welfare investment request to determine w hether the bank was improving and that a blanket application waiver for improving 3rated banks would not be appropriate. The Board has made two revisions to the proposed provision.'First, the Board has expanded this provision to preclude investment without prior approval by banks operating under a memorandum of understanding. Second, the final rule will require a bank to have overall ratings of at least “satisfactory” from its most recent consumer compliance examination in order to make a public welfare investment w ithout prior approval. Section 208.21(c) Notice to Reserve Bank. The Board proposed to require a bank that made an investment without prior approval to notify its Federal Reserve Bank within 30 days of making the investment. The proposed notice would include the amount of the investment and the identity of the entity in which the investment is made. The Board received no public comments on this provision and has adopted it as proposed. Section 208.21(d) The Board proposed that a state member bank would be able to make public welfare investments other than those specified in the regulation with prior Board approval. Scope o f public welfare investments. One commenter suggested that the Board provide further guidance as to the boundaries of public welfare investments that are not directly related to low- and moderate-income communities or families. The Board’s expansion of investments permissible without prior approval should address this commenter’s concerns. Application procedures. Three commenters suggested that the rule should address application procedures and time limits for public welfare investments. The Board has added provisions to § 208.21(d) to describe the minimum information that a public welfare investment request should contain in order to enable the Board to determine w hether the investment would meet the Federal Reserve Act’s requirements. The final rule also provides that the Board will normally act on requests w ithin 60 days, unless the Board notifies the bank that a longer period is necessary. Accordingly, a bank should request Board approval of a public welfare investment at least 60 days prior to tlje day the bank wishes to make the investment. Section 208.21(e) Divestiture. The Board proposed that a bank must divest itself of an investment made in accordance with the regulation to the extent that the investment exceeds the scope of, or ceases to meet, the requirements of the regulation. The Board proposed that the divestiture be made in the manner specified in Regulation Y for interests acquired by a lending subsidiary of a bank holding company or the bank holding company itself in satisfaction of a debt previously contracted. The Board received no public comments on this provision and has adopted it as proposed. Section 208.21(f) Preexisting investments. Under the Board proposal, if a state member bank has an ongoing public welfare investment that would not require prior approval under the regulation and was made prior to the rule’s effective date, the bank must notify its Federal Reserve Bank of the investment w ithin 60 days after the effective date. For other ongoing investments made prior to the rule’s effective date, the bank must request Board approval within one year of the effective date. The Board received no public comments on these provisions and has adopted them as proposed. Other Comments Com m unity Reinvestm ent A ct Three commenters requested that the Board address the relationship between the proposed rule and banks’ obligations under the Community Reinvestment Act (CRA). One commenter was concerned that the new investment levels would be interpreted as mandatory for state member banks by some community groups and requested that the Board clarify the role such investments should play in bank’s overall CRA program. Another commenter believed that public welfare investments should be considered in assessment of a bank’s CRA compliance in order to encourage bank participation in lending consortia outside the bank’s delineated service area. A third commenter stated that the types of investments envisioned in this rule should not supplant the bank’s responsibilities under the CRA. The Board has determined not to refer to the CRA in this regulation. The requirements of the CRA w ill continue to apply to state member banks. Public welfare investments that are authorized under this regulation may or may not qualify for CRA “credit,” depending on the nature of the investment and the requirements of the CRA. Regulation Y Two commenters urged the Board to adopt a corresponding interpretation to Regulation Y (12 CFR Part 225) so that the treatment of bank holding companies and state member banks will be consistent. The Board has adopted an interpretation to Regulation Y, published elsewhere in today’s Federal Register. Capital Treatment One commenter requested that the Board address the capital effects of this proposal. The Board believes that public welfare investments should not receive special accounting, capital, or examination treatment. Federal Register / Vol. 59, No. 236 / Friday, December 9, 1994 / Rules and Regulations Regulatory Flexibility Act Certification Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 605(b)), the Board certifies that the amendments to Regulation H will not have a significant economic impact on a substantial number of small entities, and that any impact on those entities should be positive. The amendments will reduce the regulatory burden for many state member banks by permitting them to make certain investments that had previously required Board approval, and will have no effect in other cases. 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 781(b), 781(g), 78l(i), 78o-4(c)(5), 78q, 78q— and 78w; 31 U.S.C. 5318. 1, 63711 more of the following community development activities: (A) Investing in, developing, 2. A new § 208.21 is added to Subpart rehabilitating, managing, selling, or renting residential property if a majority A to read as follows: of the units will be occupied by low§ 208.21 C om m unity d e v e lo p m e n t a n d and moderate-income persons or if the p u b lic w elfare in v e stm e n ts. property is a ‘‘qualified low-income (a) Definitions—(1) Low- or moderate- building” as defined in section 42(c)(2) incom e area means: of the Internal Revenue Code (26 U.S.C. (1) One or more census tracts in a 42(c)(2)); Metropolitan Statistical Area where the (B) Investing in, developing, median family income adjusted for rehabilitating, managing, selling, or family size in each census tract is less renting nonresidential real property or than eighty percent of the median other assets located in a low- or family income adjusted for family size Paperwork Reduction Act moderate-income area and targeted of the Metropolitan Statistical Area; or towards low- and moderate-income In accordance with section 3507 of (ii) If not in a Metropolitan Statistical persons; the Paperwork Reduction Act of 1980 Area, one or more census tracts or (C) Investing in one or more small (44 U.S.C. 3507), the information block-numbered areas where the median businesses located in a low- or collection has been reviewed by the family income adjusted for family size moderate-income area to stimulate Board under the authority delegated to in each census tract or block-numbered economic development; the Board by the Office of Management area is less than eighty percent of the (D) Investing in, developing, or and Budget (5 CFR Part 1320, Appendix median family income adjusted for otherwise assisting job training or A) after consideration of the comments family size of the State. placement facilities or programs that received during the public comment (2) Low- and moderate-income will be targeted towards low- and period. persons has the same meaning as Iow moderate-income persons; The collections of information in this an d moderate-income persons as (E) Investing in an entity located in a regulation are in 12 CFR 208.21. This defined in 42 U.S.C. 5302(a)(20)(A). low- or moderate-income area if that information is required to allow (3) Sm all business means a business entity creates long-term employment oversight of state member banks while that meets the size eligibility standards opportunities, a majority of which permitting them to make certain public of 13 CFR 121.802(a)(2). (based on full time equivalent positions) welfare investments. This information (b) Investm ents that do not require will be held by low- and moderatewill be used to track public welfare prior Board approval. Notwithstanding income persons; and investments and approve or deny the provisions of section 5136 of the (F) Providing technical assistance, certain new investments. Revised Statutes (12 U.S.C. 24 credit counseling, research, and The estimated annual burden per (Seventh)) made applicable to State program development assistance to lowrespondent varies from 2 to 10 hours, member banks by paragraph 20 of and moderate-income persons, small depending on individual circumstances, section 9 of the Federal Reserve Act (12 businesses, or nonprofit corporations to with an estimated average of 2.3 hours. U.S.C. 335), a State member bank may help achieve community development; There will be an estimated thirty-five make an investment, without prior (2) The investment is permitted by respondents filing investment Board approval, if the following State law; notifications, averaging 2 hours, an conditions are met: (3) The investment will not expose estimated fifteen respondents filing . (1) The investment is in a corporation, the State member bank to liability applications, averaging 2.5 hours, and limited partnership, or other entity: beyond the amount of the investment; an estimated two respondents filing (i) Where the Board has determined (4) The investment does not exceed divestiture notifications, averaging 5 that an investment in that entity or class the sum of two percent of the State hours. of entities is a public welfare investment member bank’s capital stock and under paragraph 23 of section 9 of the List of Subjects in 12 CFR Part 208 surplus as defined under 12 CFR Federal Reserve Act (12 U.S.C. 338a), or 250.162; Accounting, Agriculture, Banks, (5) The aggregate of all such a community development investment Banking, Confidential business investments of the State member bank under Regulation Y (12 CFR information, Crime, Currency, Federal 225.25(b)(6)); does not exceed the sum of five percent Reserve System, Mortgages, Reporting (ii) Where the Comptroller of the of its capital stock and surplus as and recordkeeping requirements, Currency has determined, by order or defined under 12 CFR 250.162; Securities. (6) The State member bank is well regulation, that an investment in that For the reasons set forth in the capitalized or adequately capitalized entity by a national bank is a public preamble, the Board is amending 12 under §§ 208.33(b) (1) and (2); welfare investment under section 5136 CFR Part 208 as set forth below: (7) The State member bank received a of the Revised Statutes (12 U.S.C. 24 composite CAMEL rating of “1” or “2” (Eleventh)); PART 208—MEMBERSHIP OF STATE (iii) Where that entity is a community under the Uniform Financial BANKING INSTITUTIONS IN THE Institutions Rating System as of its most development financial institution as FEDERAL RESERVE SYSTEM recent examination and an overall rating defined in section 103(5) of the (REGULATION H) of at least “satisfactory” as of its most Community Development Banking and 1. The authority citation for Part 208 Financial Institutions Act of 1994 (12 recent consumer compliance continues to read as follows: examination; and U.S.C. 4702(5)); or (8) The State member bank is not (iv) Where that entity, directly or Authority: 12 U.S.C. 36, 248(a), 248(c), subject to any written agreement, cease indirectly, engages solely in or makes 321-338a, 371d, 461,481-486,601,611, and desist order, capital directive, 18 1 4 ,1823(j), 1828(o), 18310,1831p-l, 3105, loans solely for the purposes of one or 63712 Federal Register / Vol. 59, No. 236 / Friday, December 9, 1994 / Rules and Regulations prompt corrective action directive, or member bank shall request Board community development corporations memorandum of understanding issued approval not more than one year after that are designed primarily to promote by the Board or a Federal Reserve Bank. January 9,1995. the public welfare of low- and (c) Notice. Not more than 30 days after moderate-income com munities and By order of the Board of Governors of the making an investment under paragraph persons in the areas of housing, services Federal Reserve System. December 2,1994. (b) of this section, the State member and employment. On November 30, W illiam W. W iles, bank shall advise its Federal Reserve 1994, the Board adopted a final rule Secretary o f the Board. Bank of the investment, including the amending Regulation H, 12 CFR 208, [FR Doc. 94-30160 Filed 12-8-94; 8:45 am] amount of the investment and the that permits state member banks to BILLING CODE 6210-01-P identity of the entity in w hich the make certain investments without investment is made. specific Board approval. (d) Investm ents requiring Board The Board believes that these approval. (1) With prior Board approval, 12 CFR Part 225 revisions are consistent with the Board’s a State member bank may make public [R egulation Y; D ocket R -0860] interpretation of, and decisions welfare investments under paragraph 23 regarding, the scope of community Bank Holding Companies and Changes welfare activities permissible for bank of section 9 of the Federal Reserve Act in Bank Control (12 U.S.C. 338a), other than those holding companies. Accordingly, the specified in paragraph (b) of this Board has revised its interpretation of AGENCY: Board of Governors of the section. Regulation Y, 12 CFR 225.127, to reflect Federal Reserve System. (2) Requests for approval under this that bank holding companies that have ACTION: Final rule; interpretation. paragraph should include, at a received approval under section 4(c)(8) minimum, the amount of the proposed of the BHC Act and § 225.25(b)(6) of the SUMMARY: The Board has revised its investment, a description of the entity interpretation regarding the scope of Board's Regulation Y to engage in in which the investment is to be made, activities that promote community community development activities an explanation of why the investment is permissible for bank holding companies welfare may make similar investments a public welfare investment under permissible for state member banks. to incorporate several decisions by the paragraph 23 of section 9 of the Federal These community development Board and to reflect statutory changes Reserve Act (12 U.S.C. 338a), a corporation and project investments by that have broadened the authority of description of the State member bank’s bank holding companies would national and state member banks to potential liability under the proposed primarily benefit low- and moderatemake certain community welfare investment, the am ount of the State income persons or small businesses, and investments. member bank’s aggregate outstanding address demonstrated community needs EFFECTIVE DATE: January 9,1995. public welfare investments under by providing housing, services, and jobs FOR FURTHER INFORMATION CONTACT: paragraph 23 of section 9 of the Federal to low- and moderate-income Scott G. Alvarez, Associate General Reserve Act, and the amount of the State Counsel (202/452— 3583), or Deborah M. communities. In particular, the revised member bank’s capital stock and interpretation provides that a bank Awai, Senior Attorney (202/452-3594), surplus as defined in 12 CFR 250.162. holding company may, directly or Legal Division; or Don E. Kline, (3) The Board will act on a request through a subsidiary: under this paragraph w ithin 60 calendar Associate Director (202/452-3421), or Larry R Cunningham, Supervisory • Invest in and provide financing to a days after receipt of a request that meets corporation or project or class of corporations Financial Analyst (202/452-2701), the requirements of paragraph (d)(2) of or projects that the Board previously has Division of Banking Supervision and this section, unless the Board notifies Regulation of the Board of Governors of determined is a public welfare project the requesting State member bank that pursuant to paragraph 23 of section 9 of the the Federal Reserve System. For the a longer time period will be required. Federal Reserve Act (12 U.S.C. 338a); hearing impaired only. (e) Divestiture o f investm ents. A State • Invest in and provide financing to a Telecommunications Device for the Deaf corporation or project that the Office of the member bank shall divest itself of an (TDD), Dorothea Thompson (202/452Comptroller of the Currency previously has investment made under paragraph (b), determined, by order or regulation, is a (d) or (f) of this section to the extent that 3544). public welfare investment pursuant to SUPPLEMENTARY INFORMATION: The Board the investment exceeds the scope of, or section 5136 of the Revised Statutes (12 has previously determined that the ceases to meet, the requirements of U.S.C. 24 (Eleventh)); making of equity and debt investments paragraphs (b)(1) through (b)(5), or • Invest in and provide financing to a in corporations or projects is designed paragraph (d) of this section. The community development financial institution divestiture shall be made in the manner “primarily to promote community pursuant to section 103(5) of the Community Development Banking and Financial specified in 12 CFR 225.140, Regulation welfare” as an activity that “is closely related to banking” u nder section 4(c)(8) Institutions Act of 1994 (12 U.S.C. 4702(5)); Y, for interests acquired by a lending • Invest in, provide financing to, develop, of the Bank Holding Company Act (12 subsidiary of a bank holding company rehabilitate, manage, sell, and rent residential U.S.C. 1843(c)(8)) (BHC Act). 12 CFR or the bank holding company itself in property if a majority of the units will be 225.25(b)(6). The Board has also satisfaction of a debt previously occupied by low- and moderate-income previously adopted an interpretation contracted. iersons, or if the property is a “qualified (f) Preexisting investm ents. (1) For that provides guidance regarding the ow-income building” as defined in section ongoing investments made prior to types of investments that are considered 42(c)(2) of the Internal Revenue Code (26 U.S.C. 42(c)(2)); January 9,1995 that are covered by to be permissible for bank holding • Invest in, provide financing to, develop, paragraph (b) of this section, a State companies under this authority. rehabilitate, manage, sell, and rent Section 6(b) of the Depository member bank shall notify its Federal nonresidential real property or other assets Institutions Disaster Relief Act of 1992 Reserve Bank of the investment not located in a low- or moderate-income area (12 U.S.C. 338a), enacted on October 23, and to be used primarily for low- and more than sixty days after January 9, 1992, amended section 9 of the Federal 1995. moderate-income persons; (2) For other ongoing investments Reserve Act to permit state member • Invest in and provide financing to one or made prior to January 9,1995, a State banks to invest in the stock of more small businesses located in a low- or f Federal Register / Vol. 59, No. 236 / Friday, December 9, 1994 / Rules and Regulations iT '-derate-income area to stimulate economic i development; • Invest in, provide financing to, develop, and otherwise assist job training and placement facilities or programs designed primarily for low- and moderate-income persons; • Invest in and provide financing to an entity located in a low- or moderate-income area if that entity creates long-term employment opportunities, a majority of which (based on full time equivalent positions) will be held by low- and moderateinc.ome persons; and • Provide technical assistance, credit <ounseling, research, and program development assistance to low- and moderate-income persons, small businesses, or nonprofit corporations,to help achieve community development. Community development corporation and project investment proposals by a bank holding company that comply with these requirements and do not exceed five percent of the total consolidated capital stock and surplus of the bank holding company when aggregated with similar types of investments made by depository institutions controlled by the bank holding company, may be made without additional Board or Reserve Bank approval. For purposes of this interpretation, the term total consolidated capital stock and surplus of the bank holding company means total equity capital a n d th e allowance for loan and lease losses. For bank holding companies that file the FR Y 9C (Consolidated Financial Statements for Bank Holding Companies), these items are readily ascertained from Schedule HC—Consolidated Balance Sheet (total equity capital (line 27h) and allowance for loan and lease losses (line 4b)). For bank holding companies filing the FR Y-SP (Parent Company Only Financial Statements for Small Bank Holding Companies), an approximation of these items is ascertained from the Balance Sheet (total equity capital (line I6e) and allowance for loan and lease losses (line 3b)) and from the Report of Condition for Insured Banks (Schedule RC—Balance Sheet (line 4b)}. The revised interpretation does not define the full scope of community welfare projects that may be permissible for bank holding companies, and is intended only to provide guidance regarding the types of projects that, in the Board’s experience, have been proposed by bank holding companies. Accordingly, a bank holding company that proposes to invest in a community development corporation or project that is not discussed in the interpretation may, nonetheless, seek Board approval to invest in or conduct such project pursuant to § 225.25(b)(6) of the Board’s Regulation Y. Such a proposal must include a detailed description and an explanation of how the project would serve the community welfare. 63713 § 225.127 In v e stm e n t in c o rp o ra tio n s o r p ro je c ts d e s ig n e d prim arily to p ro m o te co m m u n ity w elfare. * * * * ★ (0 Section 6 of the Depository Institutions Disaster Relief Act of 1992 permits state member banks (12 U.S.C. Pursuant to section 605(b) of the 338a) and national banks (12 U.S.C. 24 Regulatory Flexibility Act (5 U.S.C. (Eleventh)) to invest in the stock of 605(b)), the Board does not believe that community development corporations these changes will have a significant that are designed primarily to promote adverse economic impact on a the public welfare of low- and substantial number of small entities. moderate-income communities and The revised interpretation will reduce persons in the areas of housing, services regulatory burdens imposed by the and employment. The Board and the Board’s procedures on small bank Office of the Comptroller of the holding companies, and have no Currency have adopted rules that permit particular adverse effect on other state member banks and national banks entities. to make certain investments without Paperw ork Reduction Act Analysis prior approval. The Board believes that these rules are consistent with the In accordance with section 3507 of the Paperwork Reduction Act (44 U.S.C. Board’s interpretation of, and decisions regarding, the scope of community 3507), the revised interpretation has welfare activities permissible for bank been reviewed by the Board under the holding companies. Accordingly, authority delegated to the Board by the approval received by a bank holding Office of Management and Budget. The company to conduct activities designed Board believes there is no impact on the to promote the community welfare paperwork burden for bank holding under section 4(c)(8) of the Bank companies. Holding Company Act (12 U.S.C. 1843(c)(8)) and § 225.25(b)(6) of the List o f Subjects in 12 CFR Part 225 Board’s Regulation Y (12 CFR Administrative practice and 225.25(b)(6)) includes approval to procedure, Banks, banking, Federal engage, either directly or through a Reserve System, Holding companies, subsidiary, in the following activities, Reporting and recordkeeping up to five percent of the bank holding requirements, Securities. com pany's total consolidated capital For the reasons set forth in the stock and surplus, without additional preamble, the Board amends 12 CFR Board or Reserve Bank approval: (1) Invest in and provide financing to Part 225 as set forth below: a corporation or project or class of PART 225—BANK HOLDING corporations or projects that the Board COMPANIES AND CHANGE IN BANK previously has determined is a public CONTROL (REGULATION Y) welfare project pursuant to paragraph 23 of section 9 of the Federal Reserve Act 1. The authority citation for Part 225 (12 U.S.C. 338a); continues to read as follows: (2) Invest in and provide financing to Authority: 12 U.S.C 1817(j)(13), 1818, a corporation or project that the Office 1831i, 1813p-l, 1843(c)(8), 1844(b), 1972(1), of the Comptroller of the Currency 3106, 3108, 3310, 3331-3351, 3907, and previously has determined, by order or 3909. regulation, is a public welfare investment pursuant to section 5136 of 2. Section 225.127 is amended as the Revised Statutes (12 U.S.C. 24 follows: (Eleventh)); a. In the first sentence of paragraph (3) Invest in and provide financing to (a), the reference “ § 225.4(b)" is revised a community development financial to read “ §225.23”; institution pursuant to section 103(5) of b. In the fifth sentence of paragraph the Community Development Banking (a), the word “ permissable” is revised to and Financial Institutions Act of 1994 read “permissible” ; (12 U.S.C. 4702(5)); c. In the last sentence of paragraph (4) Invest in, provide financing to, (d), the reference to “§ 225.4(b)(1)” is develop, rehabilitate, manage, sell, and revised to read "§ 225.23”; rent residential property if a majority of d. In paragraphs (a), (b), (c), and (d), the units will be occupied by low- and all references “ § 225.4(a)(7)” are revised moderate-income persons or if the to read “§ 225.25(b)(6)”; and property is a "qualified low-income (e) New paragraphs (0, (g). and (h) are building” as defined in section 42(c)(2) added. of the Internal Revenue Code (26 U.S.C. The additions read as follows: 42(c)(2)); Regulatory Flexibility Act Analysis 63714 Federal Register / Vol. 59, No. 236 / Friday, December 9, 1994 / Rules and Regulations (5) Invest in, provide financing to, develop, rehabilitate, manage, sell, and rent nonresidential real property or other assets located in a low- or moderate-income area provided the property is used primarily for low- and moderate-income persons; (6) Invest in ana provide financing to one or more small businesses located in a low- or moderate-income area to stimulate economic development; (7) Invest in, provide financing to, develop, and otherwise assist job training or placement facilities or programs designed primarily for lowand moderate-income persons; (8) Invest in and provide financing to an entity located in a low- or moderateincome area if that entity creates long term employment opportunities, a majority of w hich (based on full time equivalent positions) will be held by low- and moderate-income persons; and (9) Provide technical assistance, credit counseling, research, and program development assistance to low- and moderate-income persons, small businesses, or nonprofit corporations to help achieve community development. (g) For purposes of paragraph (f) of this section, low- and moderate-income persons or areas means individuals and communities whose incomes do not exceed 80 percent of the median income of the area involved, as determined by the U.S. Department of Housing and Urban Development. Small businesses are businesses that are smaller than the maximum size eligibility standards established by the Small Business Administration (SBA) for the Small Business Investment Company and Development Company Programs or the SBA section 7A loan program; and specifically include those businesses that are majority-owned by members of minority groups or by women. (h) For purposes of paragraph (f) of this section, five percent of the total consolidated capital stock and surplus of a bank holding company includes its total investment in projects described in paragraph (f) of this section, when aggregated with similar types of investments made by depository institutions controlled by the bank holding company. The term total consolidated capital stock and surplus of the bank holding company means total equity capital and the allowance for loan and lease losses. For bank holding companies that file the FR Y 9C (Consolidated Financial Statements for Bank Holding Companies), these items are readily ascertained from Schedule HC—Consolidated Balance Sheet (total equity capital (line 27h) and allowance for loan and lease losses (line 4b)). For bank holding companies filing the FR Y-SP (Parent Company Only Financial Statements for Small Bank Holding Companies), an approximation of these items is ascertained from the Balance Sheet (total equity capital (line 16e)) and allowance for loan and lease losses (line 3b)) and from the Report of Condition for Insured Banks (Schedule RC—Balance Sheet (line 4b)). By order of the Board of Governors of the Federal Reserve System, December 2,1994. William W. Wiles, Secretary o f the Board. (FR Doc. 94-30159 Filed 12-8-94; 8:45 am] BILLING CODE 6210-01-P
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