[Federal Register Volume 61, Number 115 (Thursday, June 13, 1996)]
[Proposed Rules]
[Pages 29976-29992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13828]



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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / 
Proposed Rules

[[Page 29976]]



DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

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

[No. 96-47]
RIN 1550-AA88


Subsidiaries and Equity Investments

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of Thrift Supervision (OTS) is proposing to update, 
reorganize, and streamline its subsidiaries and equity investment 
regulations and policy statements. This proposal follows a detailed 
review of each pertinent regulation and policy statement to determine 
whether it is necessary, imposes the least possible burden consistent 
with safety and soundness, and is written in a clear, straightforward 
manner. Today's proposal is being made pursuant to the Regulatory 
Reinvention Initiative of the Vice President's National Performance 
Review and section 303 of the Community Development and Regulatory 
Improvement Act of 1994.

DATES: Comments must be received on or before August 12, 1996.

ADDRESSES: Send comments to Manager, Dissemination Branch, Records 
Management and Information Policy, Office of Thrift Supervision, 1700 G 
Street, NW., Washington, D.C. 20552, Attention Docket No. 96-47. These 
submissions may also be hand-delivered to 1700 G Street, NW., from 9:00 
A.M. to 5:00 P.M. on business days or may be sent by facsimile 
transmission to FAX Number (202) 906-7755. Comments will be available 
for inspection at 1700 G Street, NW., from 9:00 A.M. until 4:00 P.M. on 
business days.

FOR FURTHER INFORMATION CONTACT: Debra Merkle, Project Manager, 
Supervision Policy, (202) 906-5688; Donna Miller, Senior Program 
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, Assistant 
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 of the Proposal
II. Objectives
    A. Create More User-Friendly Subsidiary and Equity Investment 
Regulations
    B. Codify Pass-through Investment Authority
    C. Update the List of Preapproved Activities for Service 
Corporations
    D. Streamline Subsidiary Notice and Application Procedures
    E. Clarify and Simplify Computation of the Service Corporation 
Investment Limit
    F. Clarify What Constitutes a ``Subsidiary'' Under Various 
Regulatory Provisions and, in so Doing, Simplify Calculations of 
Capital
III. Historical Overview
    A. Service Corporations
    B. Finance Subsidiaries
    C. Operating Subsidiaries
    D. Pass-Through Investments
IV. Section-by-Section Analysis
    A. New Part 559--Subsidiaries
    B. Amendments to Proposed New Part 560--Lending and Investment
    C. Disposition of Existing Regulations
V. Chart Showing the Proposed Disposition of Regulations
VI. Request for Comment
VII. Paperwork Reduction Act of 1995
VIII. Executive Order 12866
IX. Regulatory Flexibility Act Analysis
X. Unfunded Mandates Act of 1995

I. Background of the Proposal

    In a comprehensive review of the agency's regulations in the spring 
of 1995, OTS identified numerous provisions for immediate repeal, plus 
several key regulatory areas for further intensive, systematic 
regulatory burden analysis. These areas--lending and investment 
authority, subsidiaries and equity investments, insurance referrals and 
loan-related fees, and charter and bylaws--were selected because they 
are vital to thrift operations, and have not been developed on an 
interagency basis or been comprehensively reviewed for many years. 
Today's proposal presents the results of an intensive review of OTS's 
subsidiary and equity investments regulations and related policy 
statements.
    Since commencing its reinvention initiative in the spring of 1995, 
OTS has already repealed eight percent of its regulations. In addition, 
in January of 1996, OTS issued a comprehensive proposal on its lending 
and investment regulations.<SUP>1 That proposal, once adopted in final 
form, will reduce the number of lending and investment regulations from 
43 to 23. Burden reduction proposals regarding charter and bylaws and 
insurance referrals and loan-related fees will be issued in the near 
future.
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    \1\ 61 FR 1162 (January 17, 1996).
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    Today's proposal regarding subsidiaries and equity investments is 
also expected to result in significant regulatory burden reduction. In 
developing this proposal, OTS considered the relevant regulations, 
guidance, legal interpretations, and reporting requirements of the 
other federal banking agencies. In addition, as with our other 
regulatory reinvention efforts, this proposal was prepared in 
consultation with those who use the regulations on a daily basis, 
including the agency's regional examination staff and a focus group 
composed of representatives of the thrift industry.
    The consensus that emerged from this process is that the primary 
need in the subsidiaries and equity investment area is to enhance 
flexibility and clarify available investment options, as opposed to 
simply eliminating large portions of regulatory text. Thus, although 
today's proposal does call for the elimination of 12 paragraphs of 
regulatory text, the most significant burden reduction is expected to 
result from clarifying investment options and streamlining procedural 
requirements.

II. Objectives

    The overarching goal of OTS's reinvention initiative is to reduce 
regulatory burden on savings associations to the greatest extent 
possible consistent with statutory requirements and safety and 
soundness. In the context of the subsidiary and equity investment 
regulations, we believe that maximum burden reduction can be achieved 
by pursuing the following six specific objectives:

[[Page 29977]]

A. Create More User-Friendly Subsidiary and Equity Investment 
Regulations

    Our first objective is to make it easier for savings associations 
to find and understand the regulations governing subsidiaries and 
equity investments. Industry representatives and other reviewers 
expressed concern that the current subsidiary and equity investment 
regulations are scattered throughout the regulations and are worded in 
a confusing manner. Accordingly, this proposal:
    <bullet> Reorganizes the regulations for easier reference. New part 
559 consolidates all of the regulations that apply directly to 
subsidiaries. It features a chart to allow ready comparisons of the 
requirements applicable to operating subsidiaries and service 
corporations. This should make it easier for savings associations to 
determine which structure will best meet their needs. The lending and 
investment chart and regulations in proposed part 560 are also being 
expanded to include permissible equity investments.
    <bullet> Employs plain language drafting. Proposed part 559 
utilizes plain language drafting techniques that have been pioneered by 
the Department of the Interior and promoted by the Vice President's 
Regulatory Reinvention Initiative. If thrifts find this approach 
helpful, OTS will expand the use of plain language drafting to 
encompass other regulatory projects. The goal of plain language 
drafting is to decrease industry frustration, inadvertent errors, the 
need to seek clarification in correspondence and phone calls, and the 
amount of staff time institutions must devote to understanding the 
regulations. Plain language drafting emphasizes the use of informative 
headings, lists and charts where appropriate, short sentences, sections 
and paragraphs, non-technical language (including the use of ``you''), 
and sentences in the active voice.

B. Codify Pass-Through Investment Authority

    Institutions and examiners have also expressed concern that OTS's 
subsidiary and equity investment regulations do not reflect all 
significant investment options. As a result, some institutions may not 
be aware of options that have been recognized in various OTS opinions 
and policy statements.
    The most significant gap in the current regulations concerns pass-
through investment authority. As is explained more fully below, federal 
savings associations have long been permitted to exercise pass-through 
investment authority, that is, to invest in companies that engage 
exclusively in activities that federal savings associations may conduct 
directly. These companies generally are organized as mutual funds or 
limited partnerships. Indirect investments of this type often offer 
important benefits--such as risk spreading, enhanced liquidity, and 
greater investment security (due to any overcollateralization or 
recourse commitment offered by the organizer of the pass-through 
entity).
    Because pass-through investment authority has been discussed in OTS 
opinions and policy statements (rather than the regulations), some 
institutions may be unaware of this investment option and applicable 
restrictions. Even institutions that are aware of the option frequently 
feel the need to write to OTS seeking confirmation or clarification of 
the circumstances under which they may exercise this authority. To 
resolve this uncertainty, OTS proposes to codify pass-through 
investment authority in proposed part 560.

C. Update the List of Preapproved Activities for Service Corporations

    OTS's service corporation regulation contains a list of preapproved 
activities that service corporations of most federal savings 
associations may conduct after notifying OTS. Service corporations 
wanting to engage in activities not on the preapproved list must submit 
a formal application to OTS demonstrating, among other things, that the 
proposed activity is reasonably related to the business of a federal 
thrift.
    The list of pre-approved service corporation activities has not 
been updated for many years. As a result, institutions are often 
required to file applications for activities that are clearly 
reasonably related, but have not yet been added to the preapproved 
list.
    The proposal updates the preapproved list in several respects. 
First, the list is being amended to confirm that all activities that 
federal savings associations may conduct directly are preapproved. This 
general authorization is substituted for the current detailed (but 
incomplete) listing of specific activities that thrifts may conduct 
directly. Second, the proposal broadens the universe of customers for 
whom certain services that are already preapproved may be provided. 
Third, the proposal adds activities that OTS has routinely approved on 
a case-by-case basis and other specific finance-related activities that 
have been authorized for bank service corporations and bank operating 
subsidiaries. Each of these changes is described in more detail below.
    The proposal also reemphasizes OTS's longstanding position that 
federal thrifts may, on a case-by-case basis, apply for approval for 
their service corporations to engage in any activity not on the 
preapproved list that is reasonably related to the operation of a 
thrift. The preapproved list reflects the most common service 
corporation activities and is not intended to be a comprehensive 
statement of every conceivable reasonably related activity.

D. Streamline Subsidiary Notice and Application Procedures

    The industry focus group made the agency aware of confusion over 
subsidiary notice and application requirements, including what 
procedures apply when converting a subsidiary from a service 
corporation to an operating subsidiary or the reverse. Regulations 
governing service corporations were first promulgated in 1965, finance 
subsidiaries in 1984, and operating subsidiaries in 1992. The 
procedures for establishing and operating each type of entity have 
never been thoroughly harmonized.
    Thus, OTS has reviewed these procedural requirements with a view 
toward enhancing consistency and clarity and substituting notices for 
more burdensome applications (or recordkeeping for notices) wherever 
feasible. As a result, the proposal:
    <bullet> Allows all savings associations to establish or acquire 
operating subsidiaries upon 30 days notice to OTS. Under current 
regulations, all but the strongest institutions must submit an 
application for prior OTS approval to establish an operating 
subsidiary. As part of this application, institutions must 
affirmatively demonstrate that the proposed operating subsidiary will 
improve the institution's financial and managerial condition. By 
contrast, the strongest institutions (i.e., those eligible for 
expedited treatment under 12 CFR 516.3(a)) need only notify OTS 30 days 
before establishing an operating subsidiary and, unless OTS objects, 
can establish their subsidiaries at the end of that period. Based on 
the agency's experience with operating subsidiaries, we have concluded 
that the 30-day notice procedure provides adequate information and 
opportunity to object whenever an operating subsidiary is proposed by 
any federal thrift--especially since operating subsidiaries can only 
engage in activities that federal thrifts may conduct directly. 
Accordingly, OTS is proposing to apply the notice procedure to all 
federal thrifts who wish to form operating subsidiaries.

[[Page 29978]]

    <bullet> Clarifies the procedures for redesignating a subsidiary as 
an operating subsidiary or a service corporation. The current 
regulations are unclear about how and when a service corporation may be 
converted into an operating subsidiary, or an operating subsidiary into 
a service corporation, and whether a notice or application must be 
filed with OTS. Both operating subsidiaries and service corporations 
are incorporated under state law. The distinctions based on ownership, 
control, and activities that separate an operating subsidiary from a 
service corporation for OTS regulatory purposes do not affect this 
underlying corporate form. OTS, therefore, has taken the position that 
merely redesignating a service corporation as an operating subsidiary 
or vice versa, without adding new activities, does not constitute an 
event requiring notice or application to OTS. The proposal makes this 
position clear by establishing explicit, streamlined recordkeeping 
provisions to document all such redesignations.
    <bullet> Streamlines salvage power procedures affecting service 
corporations. Under the current regulations, a savings association must 
file an application and obtain formal OTS approval before using its 
salvage powers to make an additional investment to protect its interest 
in a troubled service corporation. The proposal allows a savings 
association to file a notice in lieu of a formal application. Under the 
proposal, institutions will be permitted to proceed with salvage 
investments in service corporations within 30 days of filing notice, 
unless the OTS raises objection.

E. Clarify and Simplify Computation of the Service Corporation 
Investment Limit

    Section 5(c)(4)(B) of the Home Owners' Loan Act (HOLA) limits a 
federal savings association's aggregate investment in service 
corporations to 3% of total assets. The implementing regulations have 
long provided that all loans to service corporations count toward this 
investment limit, except for ``conforming loans.'' The amount of 
conforming loans that qualify for exclusion from the 3% limit varies on 
the basis of whether the lending institution owns more than 10% of the 
stock of the borrowing service corporation.
    Institutions have expressed frustration at the complexity and 
ambiguity of these service corporation investment rules. Accordingly, 
today's proposal clarifies which loans to service corporations may be 
considered separately from the general statutory service corporation 
investment limit of 3% of assets (see the discussion of proposed 
Sec. 559.4 below for details). The proposal also removes the confusing 
distinctions tied to a thrift's percentage ownership of the service 
corporation. A single rule regarding the amount of qualifying loans to 
service corporations that will be exempt from the 3% investment cap 
will be applied to all federal thrifts regardless of percentage of 
ownership of the service corporation.

F. Clarify What Constitutes a ``Subsidiary'' Under Various Regulatory 
Provisions and, in so Doing, Simplify Calculations of Capital

    Another concern expressed by the industry focus group was the 
complexity of determining the appropriate amount of capital to be held 
against service corporation investments, especially when the service 
corporation itself has investments in lower-tier entities. A further 
complication is that the HOLA ties OTS regulations in the areas of 
transactions with affiliates, lending limits, and capital to a variety 
of banking statutes and regulations that in turn define ``subsidiary'' 
differently and not entirely consistently.
    <bullet> Defines ``subsidiary'' in a manner that is more consistent 
with the other banking agencies. The proposal adopts the same 
definition of ``subsidiary'' used by the other banking agencies for 
purposes of transactions with affiliates, lending limits, and notices 
regarding subsidiaries. The proposal also modifies the capital 
definition of ``subsidiary'' to follow Generally Accepted Accounting 
Principles (GAAP) and to be more consistent with the other federal 
banking agencies. Currently, the OTS employs a definition of 
``subsidiary'' for capital purposes that is far more encompassing than 
the definitions used by the other banking agencies and GAAP. This 
sometimes results in higher capital requirements for thrifts.
    <bullet> Defines ``includable subsidiary'' in a manner that 
eliminates overstatement of the risk presented by lower-tier 
nonincludable subsidiaries. Under the current capital regulations (as 
interpreted by instructions in the Thrift Financial Report), a savings 
association's investment in a first-tier subsidiary engaged exclusively 
in activities permissible for national banks must be completely 
deducted from capital if a lower-tier subsidiary engages in any 
activity impermissible for a national bank. Deduction is required even 
when the first-tier subsidiary's investment in the lower-tier 
subsidiary constitutes a tiny portion of its total assets. Under the 
proposal, savings associations will only be required to deduct the 
actual amount of their indirect investment in the lower-tier 
nonincludable subsidiary.
    The OTS is hopeful that the foregoing reforms, taken as a whole, 
will result in a significant decrease in the regulatory burden 
associated with establishing and operating thrift subsidiaries and 
making pass-through equity investments. The remainder of this preamble 
provides a historical overview of the regulation of thrift subsidiaries 
and a detailed section-by-section description of the proposed 
amendments.

III. Historical Overview

    Regulations affecting the ability of savings associations to invest 
in service corporations and other subsidiaries and to make limited 
equity investments have evolved over the past 30 years in response to 
changes in statutes, competition, and the financial markets. The result 
has been increased flexibility in service corporation activities and in 
the permissible form of corporate structures (e.g., finance 
subsidiaries and operating subsidiaries). With this increased 
flexibility, however, has come added complexity and elements of 
inconsistency.
    In order to provide a context for OTS's current proposal, a brief 
history of key developments in the subsidiary and equity investment 
authority of federal thrifts is provided.

A. Service Corporations

    In 1964, Congress authorized federal savings associations to invest 
up to one percent of their assets in service corporations.<SUP>2 The 
statute did not limit the types of activities in which such service 
corporations could engage. The accompanying legislative history noted, 
however, that such investments were expected to be reasonably related 
in purpose to the savings and loan business.<SUP>3 This standard was 
incorporated into the implementing regulations of the Federal Home Loan 
Bank Board (FHLBB), the predecessor regulatory agency to the OTS. The 
FHLBB regulations expressly indicated that certain service corporation 
activities met the reasonably related standard and established an 
application process for considering other proposed activities. This 
allowed federal savings associations and the agency to gain experience 
in identifying appropriate service corporation activities.
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    \2\ Pub. L. 88-560, section 905, amending 12 U.S.C. 1464.
    \3\ H. Rep. 1703, 1964 U.S. Code Congressional and 
Administrative News 3444.
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    The HOLA was amended in 1980 to expand the authority of federal 
savings

[[Page 29979]]

associations ``to act as one-stop family financial centers'' <SUP>4 and 
to increase the amount a federal savings association could invest in 
its service corporations from one percent to a maximum of three percent 
of its assets.<SUP>5
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    \4\ S. Rep. 96-368 at 13, 1980 U.S. Code Congressional and 
Administrative News 248. See also 45 FR 85049 (Dec. 24, 1980).
    \5\ Depository Institutions Deregulation and Monetary Control 
Act of 1980, Pub. L. 96-221, 94 Stat. 132, section 401, amending 12 
U.S.C. 1464(c)(4)(B).
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    In December 1980, the FHLBB proposed to update the list of 
preapproved activities for service corporations.<SUP>6 In determining 
which activities were appropriate for preapproval, the FHLBB ``examined 
activities that have been approved consistently for service 
corporations upon application to the Board, newly authorized activities 
for Federal associations, and the present needs of the residential 
mortgage market.'' <SUP>7 This list of preapproved activities remains 
in effect today,<SUP>8 with only a few additions and modifications, 
such as securities brokerage services (added in 1989).<SUP>9
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    \6\ 45 FR 85048 (Dec. 24, 1980) (proposed rule); 46 FR 24526 
(May 1, 1981) (final rule).
    \7\ 45 FR at 85049.
    \8\ In 1982, the FHLBB proposed a much broader list of potential 
preapproved activities, 47 FR 9855 (March 8, 1982), but did not 
adopt the proposal in the wake of the Garn-St Germain Depository 
Institutions Act of 1982 (DIA), which significantly expanded federal 
savings association activities. The FHLBB did add personal property 
leasing and commercial lending (activities that the DIA had 
authorized for federal savings associations) and rearranged the list 
for ease of reference, 48 FR 23032 (May 23, 1983).
    \9\ 54 FR 32954 (Aug. 11, 1989).
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    In 1989, the Financial Institutions Reform, Recovery, and 
Enforcement Act (FIRREA) mandated that OTS adopt capital regulations 
requiring substantial amounts of additional capital to be held against 
thrifts' investments in subsidiaries, such as service corporations, 
that engaged as principal in activities not permissible for national 
banks. The OTS adopted these regulations in November, 1989.
    No new activities have been added to the preapproved list since 
1989, although the OTS has continued to receive, review, and process 
applications to engage in new activities on a case-by-case basis.
    Thus, the same basic regulatory structure for service corporations 
first established in 1964--a list of preapproved activities, coupled 
with authorization to apply to engage in any other reasonably related 
activities--has continued until the present. Nothing in today's 
proposal would alter this basic structure. Instead, OTS is proposing to 
update the preapproved list, clarify how to compute the service 
corporation investment limit, and simplify the capital treatment of 
investments in subsidiaries.

B. Finance Subsidiaries

    In 1984, the FHLBB recognized a federal savings association's 
incidental authority to establish finance subsidiaries.<SUP>10 These 
entities are dedicated financing vehicles created to issue securities 
that the parent association is authorized to issue and to remit the 
proceeds to the parent. The securities issued via finance subsidiaries 
have typically been collateralized mortgage obligations, mortgage-
backed bonds or Eurobonds backed by mortgages or mortgage-related 
securities. The finance subsidiary regulation has fallen into disuse 
since OTS promulgated the operating subsidiary regulation. Operating 
subsidiaries can do all that finance subsidiaries can do and more. 
Thus, we are proposing to repeal the finance subsidiary rule.
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    \10\ 49 FR 29357 (July 20, 1984).
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C. Operating Subsidiaries

    In October, 1992, the OTS authorized federal savings associations 
to establish operating subsidiaries.<SUP>11 Thrift operating 
subsidiaries were modeled on national bank operating subsidiaries. 
Under the OTS operating subsidiary regulation, a federal thrift may 
make unlimited investments in an operating subsidiary, provided the 
thrift is the majority owner and has effective operating control and 
the subsidiary engages only in activities that the thrift could conduct 
directly. Unlike service corporations, operating subsidiaries can issue 
minority ownership interests to investors that are not savings 
associations. Thus, operating subsidiaries offer federal thrifts 
greater structural flexibility. Unlike service corporations, however, 
operating subsidiaries can only do what a federal thrift could do 
directly.
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    \11\ 57 FR 48942 (Oct. 29, 1992).
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D. Pass-Through Investments

    Finance subsidiaries and operating subsidiaries are examples of 
pass-through investments. In both instances, a savings association 
acquires an interest in a company that in turn engages exclusively in 
activities that the savings association can perform directly. However, 
pass-through investment options have not been restricted to operating 
subsidiaries and finance subsidiaries.
    In 1982, the FHLBB issued a legal opinion, which was followed by a 
policy statement in 1986, recognizing that federal thrifts have 
incidental authority to invest indirectly in permissible 
investments.<SUP>12 In other words, federal thrifts can purchase shares 
of a mutual fund, a partnership interest in a limited partnership, or 
interests in a similar investment vehicle, provided the pass-through 
entity's activities are limited to those a federal thrift could conduct 
directly. At about the same time, the OCC, through legal opinions and 
guidance, authorized similar investments for national banks.
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    \12\ Memorandum T-79a, issued on June 10, 1986, memorialized 
this authority. T-memoranda issued by the FHLBB were the 
counterparts of OTS Thrift Bulletins. Memorandum T-79a has not been 
superseded by a later Thrift Bulletin.
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    These types of pass-through investments do not count against 
service corporation limits, nor are they deemed to be operating 
subsidiaries. The pass-through entity must comply with the same 
restrictions that would apply if the thrift engaged in the activity or 
held the asset directly. Additional restrictions have been imposed on a 
case-by-case basis. These include limiting the amount of investment 
that a thrift can make in any one pass-through entity to the amount 
that would be permitted under the loans to one borrower (LTOB) rule. 
(Pass-through investment authority has recently proven to be an 
important vehicle for authorizing several community development 
investments, such as purchasing limited partnership interests in Low 
Income Housing Tax Credit partnerships.)
    Several other legal opinions have authorized federal savings 
associations (like national banks) to invest, with certain 
restrictions, in certain ``special purpose corporations'' that engage 
exclusively in activities federal savings associations may conduct 
directly. To date, such corporations have been used to enable thrifts 
to pool resources with others to obtain basic support services (such as 
data processing and ATM operations) free from the operating subsidiary 
control requirement and the service corporation investment limits.
    One of the key objectives of today's proposal is to rationalize and 
harmonize these various pass-through investment options. Codification 
of these options will ensure industry awareness, reduce confusion, and 
facilitate consistent application of relevant safety and soundness 
standards.

IV. Section-by-Section Analysis

A. New Part 559--Subsidiaries

    OTS proposes to adopt a new part 559, Subsidiaries, that will 
include all of the agency's regulations affecting

[[Page 29980]]

federal thrift subsidiaries, that is, operating subsidiaries and 
service corporations. The agency believes this action will make it much 
easier for savings associations to find and use these regulations. This 
new part will utilize techniques of ``plain language'' drafting, 
employing simple expression and short sentences to the full extent 
possible.
Section 559.1  What Does This Part Cover? (Proposed)
    This proposed section explains the scope of new part 559 and sets 
forth OTS's basic statutory authority over operating subsidiaries and 
service corporations. The section first explains which regulations in 
part 559 apply only to federal savings associations and which apply to 
all savings associations. It then incorporates into one place language 
from current Secs. 545.74(b)(5) and 545.81(h) regarding limits that OTS 
may impose on subsidiary activities for supervisory, safety or 
soundness, or legal reasons.
    Proposed Sec. 559.1 also incorporates language from current 
Sec. 545.81(i). That paragraph provides that the OTS may impose 
conditions in writing when authorizing a federal thrift to acquire or 
establish an operating subsidiary or to engage in new activities in an 
existing operating subsidiary and that such conditions are enforceable. 
This statement is true for conditions OTS imposes in all of its 
approvals and authorizations, not just those involving operating 
subsidiaries. The regulation merely makes explicit what is already 
implicit in OTS's safety and soundness jurisdiction.
Subpart A--Regulations Applicable to Federal Savings Associations 
(Proposed)
    This subpart will contain regulations directly applicable only to 
operating subsidiaries and service corporations of federal savings 
associations. The subpart may indirectly apply to operating 
subsidiaries and service corporations of state-chartered savings 
associations by virtue of various statutory and regulatory provisions 
that tie state savings associations to certain requirements applicable 
to federal thrifts.<SUP>13
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    \13\ See 12 U.S.C. 1828(m) and 1831e, and 12 CFR 303.13.
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Section 559.2  What Are the Characteristics of, and What Requirements 
Apply to, Operating Subsidiaries and Service Corporations of Federal 
Savings Associations? (Proposed)
    Proposed Sec. 559.2 authorizes federal savings associations to 
establish or acquire operating subsidiaries and service corporations. 
The introductory text explains that OTS may limit this authority for 
supervisory, legal, or safety and soundness reasons.
    The majority of proposed Sec. 559.2 takes the form of a chart that 
lists, in a side-by-side format, the different characteristics of, and 
requirements that apply to, operating subsidiaries and service 
corporations. These include ownership, activities, investment limits, 
the applicability of other federal statutes and regulations, and 
notices. The chart reiterates that in addition to preapproved service 
corporation activities, a federal thrift may continue to apply to the 
OTS for case-by-case approval to engage in any activity that is 
reasonably related to the operation of a thrift.The regulation also 
confirms that state law is preempted for operating subsidiaries to the 
same extent as it is for the parent federal savings association, as has 
been the case since operating subsidiaries were first authorized. 
However, state law is not preempted for service corporations.
    Where appropriate, and for ease of reference, the subsidiaries 
chart cross-references other applicable OTS regulations that have been 
the subject of frequent questions to the agency. The chart is derived 
in large part from the current regulations at 12 CFR 545.74 and 12 CFR 
545.81. OTS expects that this format will make it easier for a federal 
savings association to compare these two structures and determine which 
best fits the association's needs.
Section 559.3  What Activities Are Permissible for Service 
Corporations? (Proposed)
    This section replaces the list of preapproved activities found in 
current Sec. 545.74(c). OTS proposes to revise the list of preapproved 
activities to:
    <bullet> Specifically 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 proposed part 560, as well as other incidental powers 
addressed in OTS legal opinions and guidance. As a result, OTS proposes 
to delete various activities from the preapproved list that federal 
thrifts are obviously permitted to conduct (e.g., lending) and to 
reiterate only those activities the service corporation may conduct 
without being subject to the same limitations that would apply to the 
federal savings association (e.g., data processing services and 
leasing). As set forth in the subsidiaries chart at Sec. 559.2(i), 
investments made by service corporations are not aggregated with the 
parent thrift for purposes of determining the parent thrift's 
compliance with any investment limits, such as those that appear in 
section 5(c) of the HOLA. For example, the educational loans made by a 
service corporation do not count against the parent thrift's 
educational lending cap (5% of assets).
    <bullet> Include certain activities that the OTS already routinely 
approves on a case-by-case basis (i.e., foreign currency exchange, 
operating a collection agency, and distributing welfare benefits).
    <bullet> Specifically include community development and charitable 
activities, including investing in community development financial 
institutions.
    <bullet> Allow business and professional activities that involve 
financial documents, financial clients, or are generally finance-
related to be performed for any person. These activities--clerical, 
accounting, and internal auditing services, advertising, liquidity 
management and credit analysis, developing personnel benefit plans, 
establishing and maintaining remote service units, and purchasing 
office supplies and equipment--currently have been preapproved only 
when performed for other financial institutions.
    <bullet> Expand the list to include a limited number of services 
that have not been previously authorized, but are reasonably related to 
the operation of a federal savings association and have been permitted 
for bank operating subsidiaries and bank service corporations. These 
include financial courier services and check and credit card guaranty 
and verification services.
    OTS seeks comment on whether certain other activities that have 
been permitted only upon application, such as acting as an insurance 
agent for private mortgage insurance, or underwriting insurance or 
reinsurance, should be preapproved activities for service corporations.
Section 559.4  How Much May a Savings Association Invest in Service 
Corporations? (Proposed)
    This proposed section replaces current Sec. 545.74(d). It 
reiterates that a savings association may invest in the

[[Page 29981]]

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. In addition, the proposal 
revises and significantly simplifies the rules governing when a federal 
savings association may make loans to service corporations separate 
from the 3% of assets limit. Such loans are only permitted when:
    (1) The federal savings association has the authority elsewhere 
under the HOLA to make the loan;
    (2) The thrift has adequate capacity under any applicable 
percentage of assets limit to make the loan (e.g., 10% of assets for 
commercial loans); and
    (3) The loan complies with the loans-to-one borrower 
regulation.<SUP>14
---------------------------------------------------------------------------

    \14\ The LTOB regulation is also being amended to clarify that 
it does apply to service corporations. It will remain inapplicable 
to a savings association's loans to its operating subsidiaries.
---------------------------------------------------------------------------

    This proposed treatment is more consistent with the OCC's treatment 
of loans to bank service corporations. It would remove the current 
aggregate regulatory limit of 50% of capital on loans to multiple 
service corporations, but subjects loans to any one service corporation 
to the LTOB requirements. A thrift (like a bank) would be able to 
exceed this limit only when making loans to a service corporation that 
are secured with exceptionally high quality collateral.
Subpart B--Regulations Applicable to All Savings Associations 
(Proposed)
Section 559.10  What Must a Savings Association and Its Subsidiary Do 
To Maintain Separate Corporate Identities?
    This section describes what a savings association and its 
subsidiaries must do to establish that they have separate identities. 
The purpose for these requirements is to reduce the potential for 
customer confusion or for a court to hold the parent liable for the 
subsidiary's conduct or obligations. The requirements are derived from 
current Secs. 545.81(f), 563.37, and 571.21.
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).
Section 559.12  How May a Subsidiary of a Savings Association Issue 
Securities?
    This section replaces current Sec. 563.132 and reiterates its basic 
requirement: a savings association must notify OTS before a subsidiary 
issues securities. The section also incorporates requirements from 
existing Sec. 545.82, 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.
Section 559.13  How May a Savings Association Exercise Its Salvage 
Power in Connection With Its Service Corporation?
    This section replaces the application procedure of current 
Sec. 563.38 with a 30-day notice requirement. In its notice, an 
institution must fully document its additional investment in a manner 
that demonstrates how its action is consistent with safety and 
soundness and document other salvage alternatives considered. The 
agency may take objection to, or grant conditional approval of, a 
notice to exercise salvage power to assist a troubled service 
corporation.

B. Amendments to Proposed New Part 560--Lending and Investment

    OTS is also proposing to add provisions dealing with subsidiary and 
equity-related investments to proposed new part 560--Lending and 
Investments.
Section 560.30  General Lending and Investment Powers for Federal 
Savings Associations
    In the interest of completeness, OTS proposes to add several 
equity- and subsidiary-related investments to the lending and 
investment powers chart contained in this regulation. The chart will 
now include investments in small business investment corporations 
chartered pursuant to section 301(d) of the Small Business Act, open-
end management investment companies, and service corporations.
Section 560.32  Pass-Through Investments
    This new section will codify 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. Unlike an operating 
subsidiary, a thrift does not have effective operating control over 
such investments. To allow thrifts flexibility while maintaining 
effective OTS supervision of such investments, OTS proposes to 
establish a safe harbor. Investments made in accordance with the safe 
harbor standards will not require advance notice to OTS. Under the safe 
harbor, a federal savings association may invest up to 15% of its 
capital without prior OTS approval in:
    (1) A limited partnership;
    (2) An open-end management investment company (mutual fund);
    (3) A closed-end investment trust; or
    (4) An entity in which the federal savings association invests 
primarily to use the services provided (e.g., data processing);

so long as the entity in which the investment is made:
    (1) Is engaged solely in activities in which the federal savings 
association itself may engage directly; and
    (2) Would not be controlled by the savings association;

and the thrift:
    (1) Has liability limited to the amount of its investment;
    (2) Has adequate capacity within the relevant HOLA investment 
category (e.g., 10% of assets for commercial loans);
    (3) Is able to monitor internal managerial controls to ensure they 
are equivalent to those the thrift would be required to have in place 
if engaging in the activity directly; and
    (4) Does not, after making the investment, have more than 50% of 
its capital invested in pass-through investments.
    A savings association must provide written notice to OTS before 
making any pass-through investment that does not meet the foregoing 
standards. OTS will review these notices and may object or impose 
conditions for supervisory, legal, or safety and soundness reasons.
    This structure will clarify the rules applicable to pass-through 
investments, thereby enhancing savings association access to this 
investment option and establishing uniform safety and soundness 
constraints. This structure will ensure that the OTS is aware of, and 
has opportunity to object, to any move by a thrift to place significant 
amounts of its assets under the operating control of third parties.
    OTS solicits comments on whether other structures, such as limited 
liability companies, should be preapproved.
Section 560.33  De Minimis Investments
    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. In the past, thrifts have 
sometimes requested permission to make (and book) de minimis equity 
investments in community organizations in an amount

[[Page 29982]]

equal to what they could otherwise directly contribute. To further 
thrifts' community development activities, OTS proposes to add a 
section specifically confirming that a federal savings association may 
make these types of de minimis investments. The proposed regulation 
provides that the investments must be of a type that would be 
permissible for a national bank under 12 CFR Part 24 and in the 
aggregate may not exceed the greater of $100,000 or one-fourth of 1% of 
a thrift's total capital.

C. Disposition of Existing Regulations

Part 545 Operations (Federal Savings Associations)
Section 545.74  Service Corporations
    Paragraph (a) of Sec. 545.74 defines terms specific to the service 
corporation section. The OTS is proposing to remove this paragraph. The 
operative provisions of new part 559 will cover the matters now 
addressed by the definitions.
    Paragraph (b) begins by restating the broad statutory authority of 
federal savings associations under section 5(c)(4)(B) of the HOLA to 
invest in service corporations that are organized under the laws of the 
state in which the association's home office is located. This authority 
will be incorporated into the proposed lending/investment chart in part 
560, with a cross-reference to the more extensive provisions contained 
in proposed part 559.
    Paragraphs (b)(1)-(5) set forth general notice, application, 
examination, and activities provisos. The proposed subsidiaries chart 
at Sec. 559.2(e)(2) incorporates the requirement in paragraph (b)(1) 
that a service corporation's activities be either pre-approved by 
regulation or specifically approved by application. The OTS proposes to 
move the notice requirements contained in paragraph (b)(2) into new 
Sec. 559.11. Paragraph (b)(3) requires weaker savings associations to 
apply to OTS for permission to engage in any activities beyond what a 
federal savings association may conduct directly. This requirement has 
been incorporated into proposed Sec. 559.2(e)(2)(ii). The examination 
requirement currently found in paragraph (b)(4) will be included in the 
subsidiaries chart at Sec. 559.2(o)(2). The restriction on activities 
where OTS has supervisory objections contained in paragraph (b)(5) has 
been incorporated into the introductory text of Sec. 559.1.
    Paragraph (c) of Sec. 545.74 first sets forth the OTS's general 
rule that federal savings associations may invest in service 
corporations that can engage in such activities reasonably related to 
the activities of federal associations as the OTS may approve. The OTS 
proposes to retain this general rule and move it to the new 
subsidiaries chart at Sec. 559.2(e)(2). Paragraph (c) next explains how 
to apply for approval to engage in such activities. OTS proposes to 
incorporate this requirement into the chart at Sec. 559.2(e)(2)(iii).
    The next sentence in paragraph (c) authorizes service corporations 
of most savings associations to engage in the listed preapproved 
activities upon satisfying a notice requirement. This requirement has 
been moved to Sec. 559.2(e)(2)(i).
    Finally, paragraph (c) lists the preapproved activities. The 
proposal would replace this list with a revised, updated compilation of 
new preapproved activities. For example, currently, a variety of 
activities that a federal savings association itself may conduct are 
scattered throughout the list as preapproved for service corporations. 
Instead of individually listing these activities, the proposal simply 
preapproves for service corporations all activities that a thrift may 
conduct directly, other than taking deposits. The list would be 
reorganized by grouping related activities and moving the list to 
proposed Sec. 559.3, as discussed more fully in section IV.A. of this 
preamble.
    Paragraph (c)(4) contains safeguards that apply to securities 
brokerage activities of service corporations. These safeguards will 
remain in that paragraph, with one exception, while OTS considers 
whether to incorporate them into new part 559, or modify the safeguards 
and apply them to all securities sales programs taking place on thrift 
premises by subsidiaries, affiliates, and broker dealers. OTS is 
proposing to remove paragraph (c)(4)(ii)(F), which has barred savings 
associations (not their service corporations) from contracting with 
third parties for securities brokerage activities. This restriction 
predates the 1994 Interagency Guidelines on Retail Sales of Nondeposit 
Investment Products. The Guidelines now contain safeguards to ensure 
that any contractual relationship with a third-party broker-dealer will 
be conducted in a proper manner. Thus, paragraph (c)(4)(ii)(F) has 
become unnecessary. Removing this restriction will provide thrifts with 
greater flexibility in structuring operations involving the sale of 
nondeposit investment products.
    Paragraph (d) addresses the permissible aggregate amount of 
investments in, or loans to, service corporations by a federal thrift. 
The HOLA specifically authorizes thrifts to invest up to 3% of their 
assets in the stock and obligations of service corporations (generally, 
2% undesignated authority plus an additional 1% for community-
development). Since 1970, the regulations have allowed a federal thrift 
to make additional loans to its service corporations if the thrift has 
the authority under the HOLA to make the same loan to a third party. 
This lending authority has been subject to limitations that changed 
over time, but has always been separate and apart from the 3% of assets 
limitation.
    For example, the current regulatory provisions allow a federal 
thrift to make ``conforming loans'' of up to 100% of its capital to any 
service corporation in which the thrift has an ownership interest of 
less than 10%, with no aggregate limit. A separate aggregate limit of 
50% of capital applies to loans made to all other service corporations. 
``Conforming loans'' is broadly defined at Sec. 545.74(a)(2) as any 
type of loan a federal savings association may make except for 
nonconforming real estate loans and unsecured construction loans. Thus, 
if a thrift currently has only one wholly-owned service corporation, it 
may, to the extent it has commercial loan authority available under the 
statutory 10% of assets limit, make commercial loans to its service 
corporation of up to 50% of its capital.
    When these provisions were last substantively amended in 1985, the 
100% of capital limit paralleled the then-existing LTOB limit. The 
percentage limits in the regulation do not reflect the new lower LTOB 
limit of 12 CFR 563.93, although paragraph (d) does state that these 
loans are subject to any applicable LTOB requirements. The LTOB 
regulation itself, however, states that it does not apply to loans made 
to subsidiaries.
    As the foregoing overview indicates, the rules governing service 
corporation investment limits and conforming loans are needlessly 
complex and confusing, and in some respects inconsistent. The OTS 
proposes to substantially revise and simplify these rules and 
incorporate them into new Sec. 559.4, as discussed more fully in 
Section IV.A. of this preamble.
    Paragraph (e) describes the circumstances under which a federal 
savings association must dispose of its investment in a service 
corporation. The OTS proposes to retain this paragraph in the new 
subsidiaries chart as Sec. 559.2(q)(2).

[[Page 29983]]

Section 545.76  Investment in Open-End Management Investment Companies
    Paragraph (a) reiterates the HOLA's statutory grant of authority to 
federal savings associations to buy, sell or otherwise deal in 
registered securities of any open-end management investment company 
that restricts its portfolio to investments that federal savings 
associations may buy, sell or otherwise deal in without limitation as 
to percentage of assets.<SUP>15 The OTS proposes to incorporate this 
provision into the lending and investment chart in proposed 
Sec. 560.30. An endnote to that chart will indicate that federal 
thrifts may be able to invest limited amounts in a broader range of 
pass-through investments under proposed new Sec. 560.32.
---------------------------------------------------------------------------

    \15\ 12 U.S.C. 1464(c)(1)(Q).
---------------------------------------------------------------------------

    Paragraph (b) provides that the maximum investment a federal thrift 
may make in any one open-end management investment company is limited 
to 5% of total assets. Paragraph (b) also applies the regulatory 
limitations imposed on a federal thrift's investments in commercial 
paper and corporate debt securities to the commercial paper and 
corporate debt securities investments of open-end management investment 
companies in which thrifts invest. The OTS proposes to remove paragraph 
(b) because its subject matter will be covered by the pass-through 
investment provisions of proposed new Sec. 560.32.
Section 545.80  Small Business Investment Corporations
    Section 545.80 reiterates section 5(c)(4)(D) of the HOLA's grant of 
statutory authority for federal savings associations to invest in small 
business investment corporations pursuant to section 301(d) of the 
Small Business Investment Company Act of 1958. The proposal moves this 
section into the proposed lending and investment powers chart in 
Sec. 560.30.
Section 545.81  Operating Subsidiaries
    Paragraph (a) sets forth federal savings associations' authority to 
establish or acquire operating subsidiaries subject to certain 
requirements. The OTS proposes to incorporate this paragraph into the 
introductory text of Sec. 559.2.
    Paragraph (b) defines the term ``operating subsidiary.'' The 
substance of this definition would be covered in the proposed 
subsidiaries chart as Sec. 559.2 (c)(1) and (e)(1).
    Paragraph (c) spells out the notice and application requirements 
that a federal savings association must meet to acquire or establish an 
operating subsidiary. Paragraph (c)(1) contains requirements for 
federal savings associations that are eligible for ``expedited 
treatment'' in the processing of applications as defined in Sec. 516.3. 
Paragraph (c)(2) covers requirements for all other federal savings 
associations. In general, institutions that qualify for expedited 
treatment need only give 30 days notice to OTS before establishing an 
operating subsidiary, whereas other institutions must file an 
application and obtain advance approval. OTS proposes to apply the 
notice procedure to all institutions. Because operating subsidiaries 
can only engage in activities that are permissible for federal thrifts 
themselves, requiring a formal application and advance approval seems 
unduly burdensome. OTS can always object during the 30-day notice 
period in the unlikely event that an operating subsidiary proposal 
raises concerns.
    Paragraph (c)(3) addresses the additional notice requirements of 
section 18(m) of the FDIA, the regulations associated with section 
18(m) and all applicable clearances under those requirements. The 
notice requirements will be consolidated with similar requirements for 
all subsidiaries and moved into the new notice Sec. 559.11.
    Paragraph (d) details the conditions under which a federal savings 
association may convert its service corporation to an operating 
subsidiary. The OTS proposes to substantially simplify this paragraph 
and incorporate the conditions in new Sec. 559.2(p).
    Paragraph (e) indicates that all federal laws, regulations and 
policies of the OTS covering the operations of federal thrifts apply to 
the operations of operating subsidiaries. The paragraph also requires 
consolidation of the parent association and its operating subsidiary 
for application of statutory and regulatory requirements and 
limitations, unless otherwise provided by statute, regulation or OTS 
policy. OTS proposes to incorporate the substance of this paragraph 
into the subsidiaries chart at Sec. 559.2(h)(1).
    Paragraph (f) subjects operating subsidiaries and their parent 
federal savings associations to the same separate corporate existence 
requirements as apply to service corporations of savings associations 
under 12 CFR 571.21 and 563.37. As discussed below, OTS proposes to 
consolidate these overlapping sections into a new Sec. 559.10.
    Paragraph (g) subjects each operating subsidiary to the same 
examination and supervision authority as its parent federal savings 
association. This requirement will be included in the subsidiaries 
chart at Sec. 559.2(o)(1).
    Paragraph (h) provides that OTS may limit, at any time, the 
activities of an operating subsidiary for supervisory or legal reasons. 
OTS proposes to place this provision in Sec. 559.1(a).
    Paragraph (i) sets forth OTS's authority to impose conditions on an 
operating subsidiary for supervisory, legal or safety and soundness 
reasons. This authority has also been inherent in the review of the 
establishment of, or commencement of new activities by, service 
corporations, but has not been specifically set forth in regulation. 
The OTS proposes to move this paragraph to Sec. 559.1(b), where it will 
explicitly apply to all conditions contained in all approvals affecting 
subsidiaries.
    Paragraph (j) authorizes parent savings associations to own a 
deposit-taking operating subsidiary under certain conditions. This 
authority would be retained and included in the proposed subsidiaries 
chart at Sec. 559.2(e)(1)(ii).
    Paragraph (k) addresses changing from an operating subsidiary to a 
service corporation. The OTS proposes to incorporate this provision 
into the subsidiaries chart at Sec. 559.2(p), where the rules governing 
changes from a service corporation to an operating subsidiary will also 
be stated.
Section 545.82  Finance Subsidiaries
    Section 545.82 authorizes federal savings associations to establish 
subsidiaries solely for the purpose of issuing securities that the 
thrift may issue directly. Thrifts were authorized to establish finance 
subsidiaries before being authorized to establish operating 
subsidiaries. Because operating subsidiaries may perform the same 
activities as finance subsidiaries without as many restrictions, the 
OTS proposes to delete this section as redundant and obsolete, except 
for paragraphs (d)(2) and (d)(3). Paragraph (d)(2) of current 
Sec. 545.82 prohibits a finance subsidiary from issuing or dealing in 
the deposits or savings accounts of its parent federal savings 
association and from representing in any way that securities issued by 
it are insured by the Federal Deposit Insurance Corporation. Paragraph 
(d)(3) prohibits a finance subsidiary from issuing any security that 
would permit accelerated payment, maturity or redemption upon the 
condition that its parent federal savings association was insolvent or 
had been placed in receivership. The agency believes both of these 
restrictions should apply to the issuance of securities by any 
subsidiary of a federal savings association.

[[Page 29984]]

Therefore, it proposes to incorporate them into proposed Sec. 559.12, 
which will replace current Sec. 563.132 and cover those issuances, as 
discussed below.
    Because the requirements for finance subsidiaries go beyond those 
applicable to operating subsidiaries, OTS proposes to deem all existing 
finance subsidiaries to be operating subsidiaries for all purposes.
Part 563--Operations
Section 563.37  Operation of Service Corporation, Liability of Savings 
Association for Debt of Service Corporation
    Paragraphs (a) and (b) of section 563.37 require savings 
associations and their service corporations to maintain a separate 
corporate existence and insulate the thrift from liability for debt of 
its service corporation. The OTS proposes to combine these requirements 
with those of 12 CFR 571.21, the policy statement regarding separate 
corporate existence of a service corporation, and move them into a new 
Sec. 559.10.
    Paragraph (c), which sets forth notice requirements for all savings 
association service corporations (not just service corporations of 
federal thrifts), would be incorporated in the new notice section, 
Sec. 559.11, where the notice requirements applicable to federal thrift 
service corporations will also appear.
Section 563.38  Salvage Power of Savings Association To Assist Service 
Corporation
    Section 563.38 addresses a savings association's use of its salvage 
power to assist a troubled service corporation. The salvage power 
doctrine permits a thrift to exceed applicable investment limitations 
where an infusion of additional capital is necessary to preserve the 
existing investment.
    Paragraph (a) prohibits a savings association from exercising its 
salvage power to assist a troubled service corporation without prior 
OTS approval. Paragraph (b) conditions such approval on the OTS 
receiving an application demonstrating that the proposed action ``is 
for the protection of the savings association's investment and is 
consistent with safe, sound, and economical home financing.'' The 
application must also address alternative solutions, including those 
not involving financial assistance, to the service corporation's 
financial problem, and contain other information as the OTS deems 
necessary.
    While it is important for the OTS to have advance knowledge of 
proposed salvage investments in service corporations, the OTS proposes 
to reduce burden by substituting a notice for the current application. 
While the notice would still contain much of the current information, 
the change would allow the savings association to make the salvage 
investment if OTS had not objected to the notice or imposed conditions 
within 30 days. The notice requirement will appear as new Sec. 559.13.
Section 563.41  Loans and Other Transactions With Affiliates and 
Subsidiaries.
    OTS proposes to modify the definition of ``subsidiary'' in this 
regulation to mirror the statutory definition of section 23A of the 
Federal Reserve Act, 12 U.S.C. 371c, rather than the OTS capital 
regulation. This will make it clear that the scope of the subsidiaries 
covered by the regulation is the same for thrifts as for banks.
Section 563.93  Lending Limitations
    Similarly, the OTS proposes to amend the scope of its loans-to-one-
borrower regulation to better conform with the scope of the OCC's 
lending limits regulation. This section will not apply to loans to a 
thrift's operating subsidiaries, but will apply to loans to its service 
corporations.
Section 563.132  Securities Issued Through Subsidiaries
    This section requires savings associations to notify OTS when 
issuing securities through a subsidiary. OTS proposes to remove 
outdated provisions from this section and transfer the remaining notice 
requirements to new Sec. 559.12.
    Paragraph (a), which defines terms for this section, is being 
deleted as those terms are no longer necessary. Paragraph (b), which 
excludes certain securities in addressing the amount of securities 
issued by a subsidiary, is being removed as obsolete. The proposed 
regulation does not limit the amount of securities a subsidiary may 
issue.
    Paragraph (c) sets forth the notice and application requirements 
that a parent savings association must satisfy prior to establishing a 
finance subsidiary, transferring additional assets to an existing 
finance subsidiary, or issuing securities through a subsidiary defined 
in paragraph (a)(1)(ii) of the section. The OTS proposes to modify the 
notice requirements of paragraph (c) by removing the references and 
requirements pertaining to finance subsidiaries and by reducing the 
application requirements to uniform notice requirements.
Part 567--Capital


Section 567.1  Definitions

    OTS proposes to amend two definitions in its capital regulation. 
First, Sec. 567.1(dd), which defines subsidiary, is being amended to 
mirror the OCC's definition of a subsidiary in its risk-based capital 
regulation, 12 CFR Part 3, Appendix A. This definition is more 
consistent with GAAP, defining a subsidiary as a company where the 
institution owns a majority of the stock. Currently, OTS employs a much 
broader definition of subsidiary, which can sometimes result in higher 
capital requirements. Proposed Sec. 567.1(dd) includes language from 
the footnote currently located in Sec. 567.1(dd), which provides that 
OTS reserves the right to review investments on a case-by-case basis to 
determine whether the investment is more appropriately treated as a 
subsidiary or as an equity investment.
    Second, Sec. 567.1(l), which defines ``includable subsidiary,'' 
currently encompasses subsidiaries that ``directly or indirectly'' 
engage in any activity not permissible for a national bank. The 
regulatory reference to ``indirect'' activities, which does not appear 
in the statutory provision upon which the regulation is based,<SUP>16 
has been interpreted (in the Thrift Financial Report) as requiring a 
savings association's entire investment in a subsidiary engaged 
exclusively in activities permissible for national banks to be deducted 
from capital if a lower-tier subsidiary engages in any activity 
impermissible for a national bank. Deduction is required even when the 
first-tier subsidiary's investment in the lower-tier subsidiary 
constitutes a minute portion of its total assets. Eliminating the 
regulatory reference to ``indirect'' activities will enable OTS to 
revise the instruction in the Thrift Financial Report. Thereafter, 
savings associations will only be required to deduct the actual amount 
of their indirect investment in the lower-tier nonincludable 
subsidiary.
---------------------------------------------------------------------------

    \16\ 12 U.S.C. 1464(t)(5)
---------------------------------------------------------------------------

Part 571--Statements of Policy
Section 571.21  Separate Corporate Existence of a Service Corporation
    Paragraph (a) sets forth the attributes of corporate separateness 
that should be maintained by a savings association and its service 
corporation. Maintaining this separate corporate identity is important 
to minimize the risks that a court, for equitable reasons, might pierce 
the corporate veil of a service corporation and hold the parent savings 
association

[[Page 29985]]

liable for the obligations or conduct of its service corporation. 
Paragraph (b), in addressing operation of service corporations and 
monitoring their compliance with paragraph (a), references 
Sec. 563.37(a) and reiterates the potential for serious risk to the 
savings association from failure to maintain corporate separateness. 
The proposal would incorporate the substantive requirements of 
Sec. 571.21 and Sec. 563.37 into new Sec. 559.10, which will apply to 
all subsidiaries.

                            V.--Chart Showing the Proposed Disposition of Regulations                           
----------------------------------------------------------------------------------------------------------------
        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).....................  559.2(e)(2)                             .....................................
545.74(b)(2).....................  559.11                                  .....................................
545.74(b)(3).....................  559.2(e)(2)(ii)                         .....................................
545.74(b)(4).....................  559.2(o)(2)                             .....................................
545.74(b)(5).....................  559.1(a)                                .....................................
545.74(c) introductory text......  559.2(e)(2)                             .....................................
545.74(c)(1)-(7).................  559.3                                   .....................................
545.74(d)........................  559.4.................................  Substantially revised.               
545.74(e)........................  559.2(q)(2)                             .....................................
545.76(a)........................  560.30                                  .....................................
545.76(b)........................  ......................................  Removed.                             
545.80...........................  560.30                                  .....................................
545.81(a)........................  559.2                                   .....................................
545.81(b)........................  559.2(c)(1), (e)(1)                     .....................................
545.81(c)(1),(2).................  559.2(a)(1)                             .....................................
545.81(c)(3).....................  559.11                                  .....................................
545.81(d)........................  559.2(p)                                .....................................
545.81(e)........................  559.2(h)(1)                             .....................................
545.81(f)........................  559.10                                  .....................................
545.81(g)........................  559.2(o)(1)                             .....................................
545.81(h)........................  559.1(a)                                .....................................
545.81(i)........................  559.1(b)..............................  Modified.                            
545.81(j)........................  559.2(e)(1)(ii)                         .....................................
545.81(k)........................  559.2(p)                                .....................................
545.82...........................  ......................................  Removed.                             
563.37(a), (b)...................  559.10................................  Modified.                            
563.37(c)........................  559.11                                  .....................................
563.38...........................  559.13................................  Modified.                            
563.41(b)(4).....................  ......................................  Modified.                            
563.93(a)........................  ......................................  Modified.                            
563.132(a),(b)...................  ......................................  Removed.                             
563.132(c).......................  559.12................................  Modified.                            
567.1(l).........................  ......................................  Modified.                            
567.1(dd)........................  ......................................  Modified.                            
571.21...........................  559.10................................  Modified.                            
----------------------------------------------------------------------------------------------------------------

VI. Request for Comment

    The OTS requests comments on all aspects of this proposal.

VII. Paperwork Reduction Act

    The reporting requirements contained in this proposed rule have 
been submitted to the Office of Management and Budget for review in 
accordance with the Paperwork Reduction Act of 1995. Comments on the 
collection 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, DC 20552.
    Comments are invited on (i) whether the collection of information 
is necessary for the proper performance of the functions of the agency, 
including whether the information shall have practical utility, (ii) 
the accuracy of the estimate of the burden of the collection of 
information, (iii) ways to enhance the quality of the information 
collected, and (iv) ways to minimize the burden of the collection of 
information on respondents, including the use of automated collection 
techniques or other forms of information technology.
    The reporting requirements in this proposed rule are currently 
found in 12 CFR 545.74, 545.81, 563.38, and 563.132. These requirements 
will be now be found in Secs. 559.2, 559.3, 559.11, 559.12, and 559.13. 
These requirements are currently addressed in the following OMB 
approved packages: Control Nos. 1550-0013; 1550-0077; and 1550-0065.
    We are proposing to repeal Sec. 545.82 (finance subsidiaries) and 
the related OMB package (Control No. 1550-0033).
    The requirements in new Sec. 560.32 will be reflected in the OMB 
approved package No. 1550-0078. The package has been amended to reflect 
the following data for the requirements in new Sec. 560.32.
    The information is needed by the OTS to assist in regulating 
savings associations and their subsidiaries.
    Estimated number of respondents: 1,460.
    Estimated average burden per respondent: 8 hours.
    Estimated annual frequency of responses: 1.
    Estimated total annual reporting burden: 11,680.

[[Page 29986]]

    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 these proposed regulations will be 
displayed in the table at 12 CFR 506.1(b).

VIII. Executive Order 12866

    The Director of the OTS has determined that this proposed rule does 
not constitute a ``significant regulatory action'' for the purposes of 
Executive Order 12866.

IX. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
OTS certifies that this proposed rule will not have a significant 
economic impact on a substantial number of small entities. The proposal 
reorganizes the regulation to make it easier for small savings 
associations to locate applicable rules. It streamlines requirements 
for all savings associations. It simplifies the applicable requirements 
when savings associations create, invest in, or conduct new activities 
through subsidiaries and clarifies the statutorily required notices for 
such actions.

X. 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 proposed rule streamlines and reduces requirements on savings 
associations. The OTS has therefore determined that the proposed rule 
will not result in expenditures by state, local, or tribal governments 
or by the private sector of $100 million or more. Accordingly, sections 
202 and 205 do not require a budgetary impact statement or discussion 
of regulatory alternatives to this proposal.

List of Subjects

12 CFR Part 545

    Accounting, Consumer protection, Credit, Electronic funds 
transfers, Investments, Manufactured homes, Mortgages, Reporting and 
recordkeeping requirements, Savings associations.

12 CFR Part 559

    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, Crime, Currency, Flood insurance, 
Investments, Morgages, Reporting and recordkeeping requirements, 
Savings associations, Securities, Surety bonds.

12 CFR Part 567

    Capital, Savings associations.

12 CFR Part 571

    Accounting, Conflict of interests, Investments, Reporting and 
recordkeeping requirements, Savings associations.

    Accordingly, and for the reasons set forth in the preamble, the 
Office of Thrift Supervision proposes to amend 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.


Sec. 545.74  [Amended]

    2. Section 545.74 is amended by removing and reserving paragraphs 
(a), (b), (d) and (e), by amending paragraph (c) by removing and 
reserving the introductory text and paragraphs (c)(1) through (c)(3) 
and (c)(5) through (c)(7), by removing and reserving paragraph 
(c)(4)(ii)(F), and by amending the introductory text to paragraph 
(c)(4)(i) by removing the words ``Execution of'' and adding in their 
place ``A service corporation may execute''.


Secs. 545.76, 545.80 through 545.82  [Removed]

    3. Sections 545.76, 545.80, 545.81, and 545.82 are removed.
    4. Part 559 is added to read as follows:

PART 559--SUBSIDIARIES

Sec.
559.1   What does this part cover?

Subpart A--Regulations Applicable to Federal Savings Associations

559.2  What are the characteristics of, and what requirements apply 
to, operating subsidiaries and service corporations of federal 
savings associations?
559.3 What activities are preapproved for service corporations?
559.4  How much may a savings association invest in service 
corporations?

Subpart B--Regulations Applicable to All Savings Associations

559.10  What must a savings association and its subsidiary do to 
maintain separate corporate identities?
559.11  What notices are required to establish or acquire a new 
subsidiary or engage in new activities through a 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?

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


Sec. 559.1  What does this part cover?

    (a) Subpart A of this part 559 contains requirements applicable to 
operating subsidiaries and service corporations of federal savings 
associations. Subpart B of this part 559 applies to subsidiaries of all 
savings associations. 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). 
OTS may at any time limit a savings association's investment in a 
subsidiary or service corporation, or may limit or refuse to permit any 
activities of a subsidiary or service corporation for supervisory, 
legal, or safety and soundness reasons.
    (b) Notices under this part are deemed to be applications for 
purposes of statutory and regulatory references to ``applications.'' 
Any conditions that OTS imposes for supervisory, legal, or safety and 
soundness reasons in approving any application 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).

Subpart A--Regulations Applicable to Federal Savings Associations


Sec. 559.2  What are the characteristics of, and what requirements 
apply to, operating subsidiaries and service corporations of federal 
savings associations?

    A federal savings association (``you'') that meets the requirements 
of this section, as detailed in the following chart, may establish, 
acquire, or acquire

[[Page 29987]]

in an interest in an operating subsidiary or a service corporation. For 
ease of reference, this section cross-references other regulations in 
this chapter affecting subsidiaries. You should refer to those 
regulations for the details of how they apply to an operating 
subsidiary or a service corporation. The chart follows:

------------------------------------------------------------------------
                                    Operating                           
                                  subsidiaries      Service corporations
------------------------------------------------------------------------
(a) How may a savings         (1) To establish an   (2) To establish a  
 association establish an      operating             service            
 operating subsidiary or a     subsidiary, you       corporation, you   
 service corporation?          must file a notice    must file a notice 
                               satisfying Sec.       satisfying Sec.    
                               559.11                559.11. Depending  
                                                     upon your condition
                                                     and the activities 
                                                     in which the       
                                                     service corporation
                                                     will engage, you   
                                                     may have to submit 
                                                     an application     
                                                     under Sec.         
                                                     559.2(e)(2).       
(b) Who may own stock?        (1) Anyone may own    (2) Only savings    
                               stock in an           associations with  
                               operating             home offices in the
                               subsidiary            state where you    
                                                     have your home     
                                                     office may own     
                                                     stock in any       
                                                     service corporation
                                                     in which you       
                                                     invest.            
(c) What are the ownership    (1) You must hold at  (2) You are not     
 requirements?                 least 50% of the      required to hold a 
                               voting stock of the   particular amount  
                               operating             of stock and need  
                               subsidiary. No one    not have control of
                               else may exercise     the service        
                               effective operating   corporation.       
                               control                                  
(d) Where may the subsidiary  (1) There are no      (2) A service       
 be incorporated?              geographic            corporation must be
                               restrictions on       incorporated in the
                               where an operating    state where your   
                               subsidiary may be     home office is     
                               incorporated.         located.           
(e) What activities are       (1)(i) After you      (2) (i) If you are  
 permissible?                  have notified OTS     eligible for       
                               in accordance with    expedited treatment
                               Sec.  559.11, an      under Sec.         
                               operating             516.3(a) of this   
                               subsidiary may        chapter, and notify
                               engage in any         OTS as required by 
                               activity that you     Sec.  559.11, your 
                               may conduct           service corporation
                               directly.             may engage in      
                                                     activities listed  
                                                     in Sec.  559.3.    
                              (ii) You may hold     (ii) If you are     
                               another insured       subject to standard
                               depository            treatment under    
                               institution as an     Sec.  516.3(b) of  
                               operating             this chapter, you  
                               subsidiary.           must apply and     
                                                     receive OTS        
                                                     approval for your  
                                                     service corporation
                                                     to engage in any   
                                                     activities except  
                                                     those authorized by
                                                     Sec.  559.3(a).    
                              (iii) Any finance     (iii) A service     
                               subsidiary that       corporation may    
                               existed on [insert    also engage in any 
                               effective date of     activity reasonably
                               final rule] shall     related to the     
                               be deemed an          activities of      
                               operating             financial          
                               subsidiary.           institutions, but  
                                                     not preapproved    
                                                     under Sec.  559.3, 
                                                     after applying to  
                                                     OTS in accordance  
                                                     with Sec.  516.1 of
                                                     this chapter and   
                                                     receiving OTS's    
                                                     prior written      
                                                     approval.          
(f) May the subsidiary        (1)(i) An operating   (2) A service       
 invest in other entities?     subsidiary may        corporation may    
                               itself hold an        invest in other    
                               operating             entities, including
                               subsidiary. All of    corporations,      
                               the requirements of   partnerships, and  
                               this part 559 apply   other joint        
                               equally to such a     ventures. All of   
                               lower tier            the requirements of
                               operating             this part apply    
                               subsidiary. In        equally to such    
                               applying the          entities except for
                               regulations in this   paragraphs (b)(2), 
                               part, operating       (d)(2), and (g)(2) 
                               subsidiaries should   of this section.   
                               substitute                               
                               ``operating                              
                               subsidiary''                             
                               wherever this part                       
                               refers to ``you''                        
                               or ``savings                             
                               association.''                           
                              (ii) An operating                         
                               subsidiary may                           
                               invest in a service                      
                               corporation. Such a                      
                               service corporation                      
                               is subject to all                        
                               of the requirements                      
                               of this part.                            
(g) Are there any limits on   (1) There are no      (2) You may invest  
 how much a savings            limits on the         up to the amounts  
 association may invest?       amount you may        set forth in Sec.  
                               invest in your        559.4 in service   
                               operating             corporations.      
                               subsidiaries,                            
                               either separately                        
                               or in the                                
                               aggregate..                              
(h) Do federal statutes and   (1) Unless otherwise  (2) (i) If the      
 regulations that apply to     specifically          federal statute or 
 the savings association       provided by           regulation         
 also apply to its             statute,              specifically refers
 subsidiaries?                 regulation, or OTS    to ``service       
                               policy, all federal   corporation,'' it  
                               statutes and          applies to all     
                               regulations apply     service            
                               to operating          corporations,      
                               subsidiaries in the   regardless of      
                               same manner as they   whether you control
                               apply to you. You     the service        
                               and your operating    corporation or     
                               subsidiary are        whether it would be
                               generally             a subsidiary under 
                               consolidated and      GAAP.              
                               treated as a unit                        
                               for statutory and                        
                               regulatory purposes.                     
                                                    (ii) If the federal 
                                                     statute or         
                                                     regulation refers  
                                                     to ``subsidiary,'' 
                                                     it applies only to 
                                                     service            
                                                     corporations that  
                                                     you control.       
(i) Do the investment limits  (1) Your assets and   (2) Your service    
 that apply to federal         those of your         corporation's      
 savings associations (HOLA    operating             assets are not     
 section 5(c) and part 560     subsidiary are        subject to the same
 of this chapter) apply to     aggregated when       investment         
 subsidiaries?                 calculating           limitations that   
                               investment            apply to you.      
                               limitations.                             
(j) How does the capital      (1) Your assets and   (2) The capital     
 regulation (part 567 of       those of your         treatment of a     
 this chapter) apply?          operating             service corporation
                               subsidiary are        depends upon       
                               consolidated for      whether it is an   
                               all capital           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.           

[[Page 29988]]

                                                                        
(k) How does the loans-to-    (1) The LTOB          (2) The LTOB        
 one-borrower (LTOB)           regulation does not   regulation applies 
 regulation (Sec.  563.93 of   apply to loans from   to loans from you  
 this chapter) apply?          you to your           to your service    
                               operating             corporation, but   
                               subsidiary or loans   does not apply to  
                               from your operating   loans from your    
                               subsidiary to you.    service corporation
                               Other loans made by   to you. Other loans
                               your operating        made by your       
                               subsidiary are        service corporation
                               aggregated with       are aggregated with
                               your loans for LTOB   your loans for LTOB
                               purposes.             purposes.          
(l) How does transactions     (1) Section 563.41    (2) Section 563.41  
 with affiliates (TWA) apply   of this chapter       of this chapter    
 to subsidiaries?              explains how TWA      explains how TWA   
                               applies to            applies to         
                               subsidiaries.         subsidiaries.      
(m) How does the Qualified    (1) Under 12 U.S.C.   (2) Under 12 U.S.C. 
 Thrift Lender (QTL) test      1467a(m)(5), you      1467a(m)(5), you   
 apply to subsidiaries?        may determine         may determine      
                               whether you wish to   whether you wish to
                               consolidate the       consolidate the    
                               assets of a           assets of a        
                               particular            particular         
                               subsidiary for        subsidiary for     
                               purposes of           purposes of        
                               calculating your      calculating your   
                               qualified thrift      qualified thrift   
                               investments.          investments.       
                               Section 563.51 of     Section 563.51 of  
                               this chapter          this chapter       
                               contains the          contains the       
                               calculations that     calculations that  
                               follow from this      follow from this   
                               determination.        determination.     
(n) Does state law apply?     (1) State law         (2) State law       
                               applies to            applies to service 
                               operating             corporations       
                               subsidiaries only     regardless of      
                               to the extent it      whether it applies 
                               applies to you.       to you.            
(o) Is the subsidiary         (1) An operating      (2) A service       
 subject to examination by     subsidiary is         corporation must   
 OTS?                          subject to            agree in writing to
                               examination by OTS.   permit and to pay  
                                                     the cost of such   
                                                     examinations as OTS
                                                     deems necessary.   
(p) What must be done to      (1) Before            (2) Before          
 redesignate an operating      redesignating an      redesignating a    
 subsidiary as a service       operating             service corporation
 corporation or a service      subsidiary as a       as an operating    
 corporation as an operating   service               subsidiary, you    
 subsidiary.                   corporation, you      should consult with
                               should consult with   the OTS Regional   
                               the OTS Regional      Director for the   
                               Director for the      Region in which    
                               Region in which       your home office is
                               your home office is   located. You must  
                               located. You must     also maintain      
                               maintain adequate     adequate internal  
                               internal records,     records, available 
                               available for         for examination by 
                               examination by OTS,   OTS, demonstrating 
                               demonstrating that    that the           
                               the redesignated      redesignated       
                               subsidiary meets      subsidiary meets   
                               all of the            all of the         
                               applicable            applicable         
                               requirements of       requirements of    
                               this part and that    this part and that 
                               your board of         your board of      
                               directors has         directors has      
                               approved the          approved the       
                               redesignation.        redesignation.     
(q) What happens if the       (1) If an operating   (2) If a service    
 subsidiary fails to comply    subsidiary fails to   corporation, or any
 with the requirements of      continue to qualify   entity in which the
 this part.                    as an operating       service corporation
                               subsidiary for any    invests pursuant to
                               reason, you must      paragraph (f)(2) of
                               notify OTS. Unless    this section, fails
                               otherwise advised     to meet any of the 
                               by OTS, if the        requirements of    
                               subsidiary cannot     this section, you  
                               comply within 90      must notify OTS.   
                               days with all of      Unless otherwise   
                               the requirements      advised by OTS, if 
                               for either an         the subsidiary     
                               operating             cannot comply      
                               subsidiary or a       within 90 days with
                               service corporation   all of the         
                               under this section,   requirements for   
                               you must promptly     either an operating
                               dispose of your       subsidiary or a    
                               investment in the     service corporation
                               subsidiary.           under this section,
                                                     you must promptly  
                                                     dispose of your    
                                                     investment in the  
                                                     subsidiary.        
------------------------------------------------------------------------




Sec. 559.3   What activities are preapproved for service corporations?

    To the extent permitted by Sec. 559.2(e)(2), 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) Courier;
    (5) Data processing;
    (6) Data storage facilities operation and related services;
    (7) Office supplies, furniture, and equipment purchasing and 
distribution;
    (8) Personnel benefit program development or administration;
    (9) Relocation of personnel;
    (10) Remote service unit operation, leasing, ownership or 
establishment;
    (11) Research studies and surveys; and
    (12) Software development and systems integration.
    (c) Credit related activities:
    (1) Abstracting;
    (2) Appraising;
    (3) Collection agency;
    (4) Credit analysis;
    (5) Check or credit card guaranty and verification;
    (6) Escrow agent or trustee (under deeds of trust, including 
executing and deliverance of conveyances, reconveyances and transfers 
of title);
    (7) Leasing; and
    (8) Loan inspection.
    (d) Consumer services:
    (1) Financial advisory or consulting;
    (2) Foreign currency exchange;
    (3) Home ownership counseling;
    (4) Income tax return preparation;
    (5) Postal services;
    (6) Stored value instrument sales; and
    (7) Welfare benefit distribution.
    (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 an association that 
owns capital stock of the service corporation, the service corporation, 
or a joint venture in which the service corporation participates.
    (f) Securities brokerage, insurance and related services:
    (1) Nondeposit investment product brokerage. 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

[[Page 29989]]

corporation complies with the provisions of Sec. 545.74(c)(4) of this 
chapter;
    (2) Investment advice, provided that the service corporation 
complies with the provisions of Sec. 545.74(c)(4) 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 a stockholder 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 
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 Section 
501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3)) 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 shareholders of the service 
corporation operate.
    (i) Activities reasonably incident to those listed in paragraphs 
(a) through (h) of this section for service corporations engaged in 
those activities.


Sec. 559.4  How much may a savings association invest in service 
corporations?

    (a) A federal savings association (``you'') may invest in the 
capital stock, obligations, and other securities of a service 
corporation. Your aggregate investment in all such service corporations 
may not exceed 3% of your assets. If you have an aggregate outstanding 
investment in excess of 2% of your assets, that excess investment 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) Except as provided in paragraph (c) of this section, your 
aggregate investment in service corporations includes all loans (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 to a service corporation and to any entity in which the service 
corporation invests, whether or not you hold stock in that entity.
    (c) In addition to the amounts you may invest under paragraph (a) 
of this section, and to the extent you have authority under section 
5(c) of the HOLA and part 560 of this chapter, you may make loans to 
any service corporation in which you hold stock. Such loans are subject 
to the loans-to-one-borrower regulation, Sec. 563.93 of this chapter. 
For purposes of the investment limits of section 5(c) of the HOLA and 
part 560 of this chapter, loans under this paragraph (c) will be 
aggregated with any other loans of that type you make.

Subpart B--Regulations Applicable to All Savings Associations


Sec. 559.10  What must a savings association and its subsidiary do to 
maintain separate corporate identities?

    (a) Each savings association and subsidiary thereof must be 
operated in a manner that demonstrates to the public the separate 
corporate existence of the savings association and subsidiary. 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 the 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 by 
the subsidiary, all borrowings by the subsidiary indicate that the 
parent is not liable.
    (b) OTS regulations that apply both to savings associations and 
subsidiaries shall not be construed as requiring a savings association 
and its subsidiaries 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 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'') are authorized to issue (or if you are a mutual savings 
association, would be authorized to issue if you converted to the stock 
form). 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. 516.1 
of this chapter at least 30 days before issuing any securities through 
an existing subsidiary or in conjunction with establishing or acquiring 
a new subsidiary. If OTS notifies you within

[[Page 29990]]

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. The 
notice must contain:
    (1) The amount of your assets or liabilities (including any 
guarantees you make with respect to the securities issuance) that you 
will transfer or make 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;
    (2) The terms of any guarantee(s) to be issued by you or any third 
party;
    (3) A description of the securities the subsidiary will issue;
    (4) An estimate of 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 anticipated amount of gross 
proceeds of the securities issuance; and the current 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 anticipated 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;
    (7) Where the subsidiary intends to market the securities; and
    (8) A statement that within 10 days after the issuance of any 
securities through a subsidiary, you will notify the OTS in writing 
that you have issued the securities and provide a copy of any 
prospectus, offering circular, or similar document concerning such 
issuance.
    (c) Sales of the subsidiary's securities to retail customers must 
comply with Sec. 545.74(c)(4) of this chapter.


Sec. 559.13  How may a savings association exercise its salvage power 
in connection with its service corporation?

    (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 (``salvage investment'') that exceeds the maximum 
amount otherwise permitted under law or regulation. You must notify OTS 
at least 30 days before making a salvage investment in a service 
corporation. This notice must demonstrate that:
    (1) The salvage investment protects your interest in the service 
corporation;
    (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).
    (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 in a service corporation.

PART 560--LENDING AND INVESTMENT

    5. Part 560 as proposed to be added at 61 FR 1177 is amended as 
follows:
    a. The authority citation for part 560 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828, 1701j-3, 
3803, 3806; 42 U.S.C. 4106.

    b. 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 Office by policy directive, 
order, or regulation:

                                       Lending and Investment Powers Chart                                      
----------------------------------------------------------------------------------------------------------------
                                                          Statutory percentage of assets limitations (endnotes  
            Category               HOLA authorization          contain applicable regulatory limitations)       
----------------------------------------------------------------------------------------------------------------
Commercial loans................  5(c)(2)(A)            10% of total assets.                                    
Commercial paper and corporate    5(c)(2)(D)            Up to 30% of total assets.\1\ \2\                       
 debt securities.                                                                                               
Community development...........  5(c)(3)(B)            5% of total assets.                                     
Community development direct      5(c)(3)(B)            2% of total assets.\3\                                  
 investments.                                                                                                   
Consumer loans..................  5(c)(2)(D)            Up to 35% of total assets.\1\ \4\                       
Credit cards....................  5(b)(4)               None.\5\                                                
Education loans.................  5(c)(3)(A)            5% of total assets.                                     
Finance leasing.................  5(c)(1)(B)            Based on collateral type for property financed.\6\      
                                  5(c)(2)(A)                                                                    
                                  5(c)(2)(D)                                                                    
Foreign assistance investments..  5(c)(4)(C)            1% of total assets.\7\                                  
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\                                            
Letters of credit...............  5(c)(2)(A)            Included in aggregate 10% of assets commercial lending  
                                                         limitation.\10\                                        
Loans secured by accounts.......  5(c)(1)(A)            None.\5\ \11\                                           
Loans to financial institutions,  5(c)(1)(L)            None.\5\ \12\                                           
 brokers, and dealers.                                                                                          
Manufactured home loans.........  5(c)(1)(J)            None.\5\ \13\                                           
Nonresidential real property      5(c)(2)(B)            400% of total capital.\14\                              
 loans.                                                                                                         
Open-end management investment    5(c)(1)(Q)            None.\5\                                                
 companies <SUP>a.                                                                                                   
Service corporations............  5(c)(4)(B)            3% of total assets, as long as any amount in excess of  
                                                         2% of total assets furthers community, inner city, or  
                                                         community development purposes.<SUP>b                       
Small business investment         5(c)(4)(D)            1% of total assets.                                     
 companies <SUP>c.                                                                                                   

[[Page 29991]]

                                                                                                                
State and local government        5(c)(1)(H)            None.\5\ \15\                                           
 obligations.                                                                                                   
State housing corporations......  5(c)(1)(P)            None.\5\ \16\                                           
Transaction account loans,        5(c)(1)(A)            None.\5\ \17\                                           
 including overdrafts.                                                                                          
----------------------------------------------------------------------------------------------------------------
Notes:                                                                                                          
\1\ For purposes of determining a Federal savings association's percentage 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.                  
\3\ This 2% of assets limitation is a sublimit within the overall 5% of assets limitation on community          
  development loans and investments.                                                                            
\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, and deposit account loans, the 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 on 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 Sec.  560.34.                
\10\ A Federal savings association may issue letters of credit subject to the provisions of Sec.  560.120.      
\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 loans 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     
  where 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.                     
<SUP>a 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.                                                                                                       
<SUP>b A Federal savings association may invest in service corporations subject to the provisions of part 559 of this
  chapter.                                                                                                      
<SUP>c 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.                                                  
\15\ 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.                                                                        
\16\ A Federal savings association may invest in state housing corporations subject to the provisions of Sec.   
  560.121.                                                                                                      
\17\ 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.                                                                                            


    C. Sections 560.32 and 560.33 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 is one where you invest in an 
entity (``company'') that engages only in activities that you may 
conduct directly. 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., 10% of assets for commercial 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 capital in one company;
    (2) You have not invested more than 50% of your total capital in 
pass-through investments;
    (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;
    (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; or
    (iv) 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 for supervisory, legal, or safety and 
soundness reasons 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).

[[Page 29992]]

Sec. 560.33  De minimis investments.

    A federal savings association may invest in the aggregate up to the 
greater of one-fourth of 1% of its capital or $100,000, in community 
development investments of the type permitted for a national bank under 
12 CFR Part 24.

PART 563--OPERATIONS

    6. 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]

    7. Sections 563.37, 563.38, and 563.132 are removed.
    8. 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 with respect to a specified savings 
association means a company that is controlled by such specified 
savings association;
* * * * *
    9. Section 563.93 is amended by revising paragraph (a) to read as 
follows:


Sec. 563.93  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 or service corporations. This section does not apply to 
loans made by a savings association to operating subsidiaries or 
affiliates of the savings association. The term operating subsidiary 
has the same meaning indicated in Sec. 559.2 of this chapter. The terms 
subsidiary and affiliate have the same meanings as those terms are 
defined in Sec. 563.41.
* * * * *

PART 567--CAPITAL

    10. The authority citation for part 567 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828 
(note).

    11. 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 more than a 50% ownership interest.<SUP>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 Office reserves the right to review a savings 
association's investment in a subsidiary on a case-by-case basis. If 
the Office 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

    12. 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]

    13. Section 571.21 is removed.

    Dated: May 28, 1996.

    By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 96-13828 Filed 6-12-96; 8:45 am]
BILLING CODE 6720-01-P