[Federal Register Volume 66, Number 246 (Friday, December 21, 2001)]
[Rules and Regulations]
[Pages 65822-65827]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31052]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 559 and 560

[No. 2001-82]
RIN 1550-AB37


Lending and Investment

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (``OTS'') is revising and 
clarifying its lending and investment regulations to give savings 
associations greater flexibility in a changing marketplace. Today's 
regulatory amendments are intended to help thrifts take better 
advantage of the flexibility available under the Home Owners' Loan Act 
(``HOLA''), to provide low-cost credit to their customers, and to 
invest in their communities while still operating safely and soundly.

EFFECTIVE DATE: This rule is effective on January 1, 2002.

FOR FURTHER INFORMATION CONTACT: William J. Magrini, Senior Project 
Manager, Supervision Policy, (202) 906-5744; Karen Osterloh, Assistant 
Chief Counsel, Regulations and Legislation Division, (202) 906-6639, 
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    OTS periodically reviews its lending and investment regulations to 
ensure that they enhance safe and sound lending, implement statutory 
requirements, protect consumers, minimize regulatory burden, and are 
clearly written. OTS lending and investment regulations have been 
considerably modified over time as savings associations, their markets, 
their competition, and the economy have changed. For the most part, OTS 
has taken a contract and market-based approach to provide flexibility 
for thrifts and their customers and to encourage innovations in lending 
to help make credit more available.
    OTS last substantively revised its lending regulations and 
subordinate organizations regulations in 1996.\1\ Since that time, the 
markets in which thrifts operate have changed substantially. In the 
primary market, savings associations now compete with other mortgage 
lenders to offer potential borrowers a wide variety of options besides 
the traditional 30-year fixed-rate purchase money mortgage. The 
secondary market continues to narrow the interest-rate spread on high 
quality mortgages.
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    \1\ See Lending and Investment Final Rule, 61 FR 50951 (Sept. 
30, 1996); Subsidiaries and Equity Investments, 61 FR 66561 (Dec. 
18, 1996).
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    As the residential mortgage market has evolved, thrifts have 
increasingly begun to explore offering other types of credit needed in 
their communities, including consumer lending and small business 
lending. A variety of community-related investment opportunities offer 
thrifts new ways to serve and to participate in the economic 
development of their communities. Thrifts have asked whether and how 
such loans and investments may be made by either the thrift itself or 
through an operating subsidiary or service corporation.
    This evolving environment made it appropriate for OTS to again re-
examine and update its lending and investment and subordinate 
organizations regulations. Accordingly, on November 1, 2001, OTS 
published a proposed rule intended to help thrifts take better 
advantage of the flexibility available under the Home Owners' Loan Act 
(``HOLA''), to provide low-cost credit to their customers, and to 
invest in their communities while still operating safely and soundly. 
66 FR 55131 (Nov. 1, 2001).

II. Analysis of Comments

    OTS received eight public comments from three Federal savings 
associations, three trade associations, a community group, and an 
individual. Seven commenters supported the rule, but recommended 
modifications. The commenter opposing the rule incorrectly believed 
that the rule applied to institutions with a common bond (i.e., credit 
unions), rather than thrifts. The remaining comments are summarized 
below.

Small Business Loans

    Existing Sec. 560.3 provides two alternatives for determining 
whether a particular loan qualifies as a small business loan.\2\ First, 
a loan of any size qualifies if the loan is made to a business that 
meets the size standards established by the Small Business 
Administration. Second, a loan qualifies if a savings association makes 
a loan to a business and the amount of the loan is less than $1 
million, or makes a loan to a farm and the amount of the loan is less 
than $500,000. OTS proposed to raise this safe harbor amount to $2 
million for both small business and farm loans.
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    \2\ Sections 5(c)(2)(A) and 10(m)(4)(E) specifically authorize 
the Director to define the terms ``small business loans'' and 
``small business'' for purposes of HOLA investment limits and the 
Qualified Thrift Lender test, respectively.
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    Most commenters supported the increase. One commenter, however, 
noted that the existing definition is more consistent with an emphasis 
on serving the smallest businesses and farms and with the Community 
Reinvestment Act (CRA) definition of small business and farm loan. This 
commenter feared that the proposed increase could cause thrifts to 
neglect the smallest businesses.

[[Page 65823]]

    The proposed changes were designed to define the scope of a Federal 
savings association's lending and investment powers, rather than to 
assess the adequacy of its CRA performance. OTS believes that the 
additional flexibility afforded by the proposed modification will 
enable more savings associations to provide a broader range of small 
business customers with credit products tailored to their needs, 
particularly in higher price geographic areas. OTS will continue to 
assess an institution's record of meeting the credit needs of the local 
communities, including small business lending, under the CRA and CRA 
implementing regulations at 12 CFR part 563e.\3\
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    \3\ Another commenter asked OTS to conform the definitions of 
``small business loan'' set out in the CRA regulations and in the 
Thrift Financial Report (TFR) to include the $2 million safe harbor 
threshold. Revisions to the CRA regulations are beyond the scope of 
this rulemaking. However, OTS is working on an interagency basis to 
update and amend the CRA regulations. See Advance Notice of Proposed 
Regulations published July 19, 2001 (66 FR 37602). The agencies may 
consider revisions to the CRA definition of ``small business loan'' 
in that rulemaking. In addition, OTS continually reevaluates the TFR 
and the instructions to the TFR to ensure that the terms used 
appropriately reflect OTS regulations, and will review these 
documents in light of the changes made in today's final rule.
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    To satisfy the safe harbor under the current and proposed rules, a 
savings association must make the loan to ``a business or farm.'' 
Several commenters noted that commercial loans are often made to 
individuals who use the proceeds for their own small businesses. To 
accommodate this lending, commenters suggested that OTS should apply 
the $2 million safe harbor if loan proceeds are used for business or 
commercial purposes. OTS has always believed that such loans fall 
within the definition, but has modified the safe harbor in the final 
rule to make clear that it applies to loans that are for ``commercial, 
corporate, business, or agricultural purposes.'' See 12 U.S.C. 
1464(c)(2)(A).

De Minimis Investments

    Existing Sec. 560.36 permits a Federal savings association to 
invest the greater of one-fourth of one percent of its total capital or 
$100,000 in community development investments of the type permitted 
under 12 CFR part 24. OTS proposed to increase these limits to the 
greater of one percent of an association's total capital or $250,000. 
One commenter urged OTS to increase this limit to the national bank 
limit (five percent of capital stock paid in and five percent of 
unimpaired surplus). See 12 U.S.C. 24 (Eleventh) and 12 CFR part 24.
    The proposed increase to the community development investment 
limits attempts to give thrifts authority as comparable to that of 
banks as possible, given the different statutory authority.\4\ Because 
Federal thrifts have other community development investment options 
that are not available to national banks, OTS is not inclined to 
increase the de minimis authority beyond the proposed amount at this 
time.
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    \4\ The HOLA does not contain a provision paralleling the 
authority of 12 U.S.C. 24 (Eleventh). However, OTS has long 
recognized that a Federal savings association may make community 
development related investments to raise its profile in its market 
as a form of advertising.
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    In addition to the de minimis authority, Federal savings 
associations are permitted to invest in certain community development 
and charitable activities through service corporations.\5\ One 
commenter requested clarification that the authority to invest in 
public welfare investments under the de minimis authority in 
Sec. 560.36 is not contingent on the balance of public welfare 
investments made under the service corporation authority. OTS has 
consistently stated that if a loan or investment is authorized under 
more than investment authority, a Federal savings association may 
designate the section under which the loan or investment is made. See 
12 CFR 560.31.\6\ Section 559.3(i) also specifically provides that 
investments made at the service corporation level are not aggregated 
with those made at the thrift level when calculating HOLA investment 
limitations. Compare Sec. 559.3(i)(1) (operating subsidiaries) with 
Sec. 559.3(i)(2) (service corporations). Thus, the amount a savings 
association may invest directly in public welfare investments under 
Sec. 560.36 is not contingent on the balance of public welfare 
investments made through a service corporation.
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    \5\ In the proposed rule, OTS revised the service corporation 
regulation at Sec. 559.4(h) to clarify that these service 
corporation investments include those that ``designed primarily to 
promote the public welfare, including the welfare of low- and 
moderate-income communities or families (such as by providing 
housing, services, or jobs.)'' This modification clarified that 
Federal savings association service corporations have the same 
authority as national banks and state member banks to make 
investments to promote the public welfare (see 12 U.S.C. 24 
(Eleventh) and 12 U.S.C. 338a, respectively). One commenter noted 
that the amount that national banks may invest in public welfare 
investments is limited to five percent of capital stock paid in plus 
five percent of unimpaired surplus. The commenter asked OTS to 
clarify whether these national bank limits also restrict the amount 
of the service corporation public welfare investment. The proposed 
modification to Sec. 559.4 was intended to define the scope of 
permissible investments, not the limits on the amount of the 
investment. OTS existing regulations define the limits on the amount 
of a thrift's investment in service corporations at 12 CFR 559.5. 
This regulation does not incorporate the national bank limitation on 
public welfare investments.
    \6\ See generally Thrift Bulletin 78 ``Classifying Commercial 
and Other Loans under the Home Owners' Loan Act'' (October 5, 2001).
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Commercial Paper and Corporate Debt Securities

    Existing Sec. 560.40 reiterates HOLA's grant of statutory authority 
to Federal thrifts to invest in commercial paper and corporate debt 
securities and sets out limitations on that authority.\7\ Recently, 
some Federal savings associations have purchased complex investment 
securities with nonstandard ratings, ratings that only apply to the 
principal amount rather than both the principal and interest, or 
payment features such as residuals. These investments tend to be 
speculative in nature, and their likelihood of producing a particular 
rate of return is difficult to assess even where they may be partially 
guaranteed or rated investment grade. These investments are clearly not 
intended to hedge interest rate risk or credit risk. Rather, their 
potential purchase creates risks that highlight the need for savings 
associations to perform thorough underwriting analyses. To address 
issues raised by these types of investments, OTS proposed changes to 
Sec. 560.40 to codify the agency's existing expectations about the 
circumstances under which these investments may be made.
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    \7\ 12 U.S.C. 1464(c)(2)(D).
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    Among other requirements, OTS proposed that a Federal savings 
association must determine whether an investment security is safe and 
sound and suitable for the association before committing to acquire the 
security. The proposed rule indicated that a Federal savings 
association must consider, as appropriate, the interest rate, credit, 
liquidity, price, transaction, and other risks associated with the 
investment activity. One commenter supported this provision, but 
requested confirmation that an investment need not be reasonable under 
each separate criterion. The risks of each investment should be 
evaluated on an overall basis. Individual risk factors may impact the 
overall safety and soundness of a particular investment so 
significantly that they may not be offset by other strengths of the 
investment. On the other hand, a slight deviation in one area may not 
have such an impact on the overall safety and soundness of an 
investment. These determinations are inherently case-by-case. As a 
result, OTS cannot provide the requested confirmation.
    The preamble to the proposed rule indicated that a savings 
association has

[[Page 65824]]

an ongoing responsibility to monitor its investments in commercial 
paper and debt securities. One commenter observed that the rule text 
does not incorporate a review requirement or indicate what factors 
should be addressed in this analysis. OTS believes that the ongoing 
review responsibilities should be left to each institution based on the 
level and complexity of its investment activity. OTS has issued 
guidance concerning appropriate initial and continuing underwriting 
criteria.\8\
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    \8\ E.g., Memorandum for Chief Executives 130 dated October 23, 
2000. This memorandum indicates that management has an ongoing 
responsibility to monitor the investment, including cash flows, 
collateral quality, and the performance of the underlying assets of 
the security at least quarterly to determine the effect of any 
changes on the association's investment. Thrift Bulletin 13a also 
provides guidance on the fundamental underwriting standards thrifts 
should use in this area.
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    The commenter also noted that the rule does not address the actions 
required of an institution if an investment fails to meet the original 
assumptions or suitability requirements subsequent to its acquisition. 
Depending on the circumstances of each case, OTS may, as a part of its 
ongoing supervision and oversight, criticize an institution's 
investments, its investment activities, or its investment policies, and 
will require appropriate remedial action as necessary.

Loan Purchases

    One commenter asked OTS to add a new provision requiring savings 
associations to screen loan purchases for abusive and predatory 
features. This request addresses important issues beyond the scope of 
the proposal and is not an area OTS believes appropriate to address in 
this final rule without further public input and analysis. Nonetheless, 
a Federal savings association must determine the safety, soundness, and 
suitability of any investment or purchase, and should consider the 
reputation of the seller and the quality and underwriting standards of 
the loans it purchases.

III. Effective Date

    In the proposed rule, OTS stated that it intended to publish a 
final rule that will be effective on January 1, 2002. See 66 FR 55131, 
at 55135 (Nov. 1, 2001). Section 553 of the Administrative Procedure 
Act (APA), however, provides that a final rule must not be made 
effective before 30 days after its publication, 5 U.S.C. 553(b)(B), 
unless the rule grants or recognizes an exemption or relieves a 
restriction.
    Today's final rule relieves restrictions by enhancing savings 
associations' flexibility to offer a greater range of products, to 
invest in activities that support their local communities, and to 
compete more effectively with other financial institutions. It also 
relieves restrictions by permitting savings associations to make a 
greater amount of community development investments. Finally, the final 
rule rewrites certain provisions using plain language drafting 
techniques, which will make it easier for all savings associations to 
comply with OTS regulations. Accordingly, OTS has concluded that the 
final rule relieves restrictions and that the APA does not require OTS 
to delay its effective date for 30 days.
    This rule is effective on January 1, 2002. This date is consistent 
with section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (CDRIA), which requires final rules to take 
effect on the first day of a calendar quarter that begins on or after 
the date of publication of the rule. 12 U.S.C. 4802.

IV. Executive Order 12866

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

V. Unfunded Mandates Reform 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, 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. OTS has determined that the final rule will not 
result in expenditures by state, local, or tribal governments or by the 
private sector of $100 million or more. Accordingly, a budgetary impact 
statement is not required under section 202 of the Unfunded Mandates 
Act of 1995.

VI. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS 
certifies that this final rule will not have a significant economic 
impact on a substantial number of small entities. The final rule makes 
certain changes that reduce burden on all savings associations, 
including small institutions. The final rule reduces burden on all 
savings associations by enhancing thrifts' flexibility to offer a 
greater range of products, to invest in activities that support their 
local communities, and to compete more effectively with other financial 
institutions. The final rule allows small savings associations to make 
a greater amount of community development investments. Finally, the 
final rule revises Sec. 560.42 into plain language, which will make it 
easier for all savings associations to comply with the regulation. 
Accordingly, OTS concludes that this final rule will not have a 
significant economic impact on a substantial number of small entities.

List of Subjects

12 CFR Part 559

    Reporting and recordkeeping requirements, Savings associations, 
Subsidiaries.

12 CFR Part 560

    Consumer protection, Investments, Manufactured homes, Mortgages, 
Reporting and recordkeeping requirements, Savings associations, 
Securities.

    Accordingly, the Office of Thrift Supervision amends 12 CFR chapter 
V, as follows.

PART 559--SUBORDINATE ORGANIZATIONS

    1. The authority citation for part 559 continues to read as 
follows:

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


    2. Section 559.4 introductory text, and paragraphs (g)(3), (h)(2) 
and (3), and (i) are revised; and Sec. 559.4(j) is added to read as 
follows:


Sec. 559.4  What activities are preapproved for service corporations?

    This section sets forth the activities that have been preapproved 
for service corporations. Section 559.3(e)(2) of this part sets forth 
the procedures for engaging in a broader scope of activities on a case-
by-case basis. You should read these two sections together to determine 
whether you must file a notice with OTS under Sec. 559.11 of this part, 
or whether you must file an application under part 516 of this chapter 
and receive prior written OTS approval for your service corporation to 
engage in a particular activity. To the extent permitted by 
Sec. 559.3(e)(2) of this part, a service corporation may engage in the 
following activities:
* * * * *
    (g) * * *

[[Page 65825]]

    (3) Small business investment companies and new markets venture 
capital companies licensed by the U.S. Small Business Administration; 
and
* * * * *
    (h) * * *
    (2) Investments designed primarily to promote the public welfare, 
including the welfare of low- and moderate-income communities or 
families (such as providing housing, services, or jobs);
    (3) Investments in low-income housing tax credit and new markets 
tax credit projects and entities authorized by statute (e.g., community 
development financial institutions) to promote community, inner city, 
and community development purposes; and
* * * * *
    (i) Activities conducted on behalf of a customer on an other than 
``as principal'' basis.
    (j) Activities reasonably incident to those listed in paragraphs 
(a) through (i) of this section if the service corporation engages in 
those activities.

PART 560--LENDING AND INVESTMENT

    3. The authority citation for part 560 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3, 
1828, 3803, 3806; 42 U.S.C. 4106.


    4. Section 560.3 is amended by revising the first sentence in the 
definition of ``Real estate loan'' and by revising the definition of 
``Small business loans and loans to small businesses'' as follows:


Sec. 560.3  Definitions.

* * * * *
    Real estate loan, for purposes of this part, is a loan for which 
the savings association substantially relies upon a security interest 
in real estate given by the borrower as a condition of making the loan. 
* * *
* * * * *
    Small business loans and loans to small businesses include any loan 
to a small business as defined in this section; or a loan that does not 
exceed $2 million (including a group of loans to one borrower) and is 
for commercial, corporate, business, or agricultural purposes.

    5. 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 OTS by policy directive, order, 
or regulation:

                   Lending and Investment Powers Chart
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                                                    Statutory investment
                                                   limitations (Endnotes
           Category                 Statutory       contain  applicable
                                authorization \1\        regulatory
                                                        limitations)
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Bankers' bank stock...........  5(c)(4)(E).......  Same terms as
                                                    applicable to
                                                    national banks.
Business development credit     5(c)(4)(A).......  The lesser of .5% of
 corporations.                                      total outstanding
                                                    loans or $250,000.
Commercial loans..............  5(c)(2)(A).......  20% of total assets,
                                                    provided that
                                                    amounts in excess of
                                                    10% of total assets
                                                    may be used only for
                                                    small business
                                                    loans.
Commercial paper and corporate  5(c)(2)(D).......  Up to 35% of total
 debt securities.                                   assets.<SUP>2</SUP> <SUP>3</SUP>
Community development loans     5(c)(3)(A).......  5% of total assets,
 and equity equity investments.                     provided equity
                                                    investments do not
                                                    exceed 2% of total
                                                    assets.\4\
Construction loans without      5(c)(3)(C).......  In the aggregate, the
 security.                                          greater of total
                                                    capital or 5% of
                                                    total assets.
Consumer loans................  5(c)(2)(D).......  Up to 35% of total
                                                    assets.<SUP>2</SUP> <SUP>5</SUP>
Credit card loans or loans      5(c)(1)(T).......  None.\6\
 made through credit card
 accounts.
Deposits in insured depository  5(c)(1)(G).......  None.\6\
 institutions.
Education loans...............  5(c)(1)(U).......  None.\6\
Federal government and          5(c)(1)(C),        None.\6\
 government-sponsored            5(c)(1)(D),
 enterprise securities and       5(c)(1)(E),
 instruments.                    5(c)(1)(F).
Finance leasing...............  5(c)(1)(B),        Based on purpose and
                                 5(c)(2)(A),        property
                                 5(c)(2)(B),        financed.\7\
                                 5(c)(2)(D).
Foreign assistance investments  5(c)(4)(C).......  1% of total
                                                    assets.\8\
General leasing...............  5(c)(2)(C).......  10% of assets.\7\
Home improvement loans........  5(c)(1)(J).......  None.\6\
Home (residential) loans \9\..  5(c)(1)(B).......  None.<SUP>6</SUP> <SUP>10</SUP>
HUD-insured or guaranteed       5(c)(1)(O).......  None.\6\
 investments.
Insured loans.................  5(c)(1)(I),        None\6\
                                 5(c)(1)(K).
Liquidity investments.........  5(c)(1)(M).......  None.\6\
Loans secured by deposit        5(c)(1)(A).......  None.<SUP>6</SUP> <SUP>11</SUP>
 accounts.
Loans to financial              5(c)(1)(L).......  None.<SUP>6</SUP> <SUP>12</SUP>
 institutions, brokers, and
 dealers.
Manufactured home loans.......  5(c)(1)(J).......  None.<SUP>6</SUP> <SUP>13</SUP>
Mortgage-backed securities....  5(c)(1)(R).......  None.\6\
National Housing Partnership    5(c)(1)(N).......  None.\6\
 Corporation and related
 partnerships and joint
 ventures.
New markets venture capital     5(c)(4)(F).......  5% of total capital.
 companies.
Nonconforming loans...........  5(c)(3)(B).......  5% of total assets.
Nonresidential real property    5(c)(2)(B).......  400% of total
 loans.                                             capital.\14\
Open-end management investment  5(c)(1)(Q).......  None.\6\
 companies \15\.
Service corporations..........  5(c)(4)(B).......  3% of total assets,
                                                    as long as any
                                                    amounts in excess of
                                                    2% of total assets
                                                    further community,
                                                    inner city, or
                                                    community
                                                    development
                                                    purposes.\16\
Small business investment       15 U.S.C.          5% of total capital.
 companies.                      682(b)(2).

[[Page 65826]]

 
Small-business-related          5(c)(1)(S).......  None.\6\
 securities.
State and local government      5(c)(1)(H).......  None for general
 obligations.                                       obligations. Per
                                                    issuer limitation of
                                                    10% of capital for
                                                    other
                                                    obligations.\6\ \17\
State housing corporations....  5(c)(1)(P).......  None.\6\ \18\
Transaction account loans,      5(c)(1)(A).......  None.\6\ \19\
 including overdrafts.
------------------------------------------------------------------------

Endnotes

    1. All references are to section 5 of the Home Owners' Loan Act 
(12 U.S.C. 1464) unless otherwise indicated.
    2. For purposes of determining a Federal savings association's 
percentage of assets limitation, investment in commercial paper and 
corporate debt securities must be aggregated with the Federal 
savings association's investment in consumer loans.
    3. 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 of this part. Amounts in excess of 30% of assets, in the 
aggregate, may be invested only in obligations purchased by the 
association directly from the original obligor and for which no 
finder's or referral fees have been paid.
    4. The 2% of assets limitation is a sublimit for investments 
within the overall 5% of assets limitation on community development 
loans and investments. The qualitative standards for such loans and 
investments are set forth in HOLA section 5(c)(3)(A) (formerly 
5(c)(3)(B), as explained in an opinion of the OTS Chief Counsel 
dated May 10, 1995 (available at www.ots.treas.gov)).
    5. Amounts in excess of 30% of assets, in the 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.
    6. While there is no statutory limit on certain categories of 
loans and investments, including credit card loans, home improvement 
loans, education loans, and deposit account loans, 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.
    7. A Federal savings association may engage in leasing 
activities subject to the provisions of Sec. 560.41 of this part.
    8. 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 of 
this part.
    9. A home (or residential) loan includes loans secured by one-
to-four family dwellings, multi-family residential property, and 
loans secured by a unit or units of a condominium or housing 
cooperative.
    10. A Federal savings association may make home loans subject to 
the provisions of Secs. 560.33, 560.34, and 560.35 of this part.
    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 these loans 
if they are 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, 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.
    15. 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 of 
this part.
    16. A Federal savings association may invest in service 
corporations subject to the provisions of part 559 of this chapter.
    17. 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 of this part.
    18. A Federal savings association may invest in state housing 
corporations subject to the provisions of Sec. 560.121 of this part.
    19. 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.


    6. Revise 560.36 to read as follows:


Sec. 560.36  De minimis investments.

    A Federal savings association may invest in the aggregate up to the 
greater of 1% of its total capital or $250,000 in community development 
investments of the type permitted for a national bank under 12 CFR part 
24.

    7. Amend Sec. 560.40 by adding the words ``as to the portion of the 
security in which the association is investing'' after ``categories'' 
in Sec. 560.40(a)(2)(ii) and by adding Sec. 560.40(c) to read as 
follows:


Sec. 560.40  Commercial paper and corporate debt securities.

* * * * *
    (c) Underwriting. Before committing to acquire any investment 
security, a Federal savings association must determine whether the 
investment is safe and sound and suitable for the association. The 
Federal savings association must consider, as appropriate, the interest 
rate, credit, liquidity, price, transaction, and other risks associated 
with the investment activity. The Federal savings association must also 
determine that the issuer has adequate resources and the willingness to 
provide for all required payments on its obligations in a timely 
manner.

    8. Revise 560.42 to read as follows:


Sec. 560.42  State and local government obligations.

    (a) What limitations apply? Pursuant to HOLA section 5(c)(1)(H), a 
Federal savings association (``you'') may invest in obligations issued 
by any state, territory, possession, or political subdivision thereof 
(``governmental entity''), subject to appropriate underwriting and the 
following conditions:

[[Page 65827]]



------------------------------------------------------------------------
                                       Aggregate          Per-issuer
                                      limitation          limitation
------------------------------------------------------------------------
(1) General obligations.........  None..............  None.
(2) Other obligations of a        None..............  10% of total
 governmental entity (e.g.,                            capital.
 revenue bonds) that hold one of
 the four highest investment
 grade ratings by a nationally
 recognized rating agency or
 that are nonrated but of
 investment quality.
(3) Obligations of a              As approved by      10% of total
 governmental entity that do not   your Regional       capital.
 qualify under any other           Director
 paragraph but are approved by
 your Regional Director.
------------------------------------------------------------------------

    (b) What is a political subdivision? Political subdivision means a 
county, city, town, or other municipal corporation, a public authority, 
or a publicly-owned entity that is an instrumentality of a state or a 
municipal corporation.
    (c) What is a general obligation of a state or political 
subdivision? A general obligation is an obligation that is guaranteed 
by the full faith and credit of a state or political subdivision that 
has the power to tax. Indirect payments, such as through a special 
fund, may qualify as general obligations if a state or political 
subdivision with taxing authority has unconditionally agreed to provide 
funds to cover payments.
    (d) What is appropriate underwriting for this type of investment? 
In the case of a security rated in one of the four highest investment 
grades by a nationally recognized rating agency, your assessment of the 
obligor's credit quality may be based, in part, on reliable rating 
agency estimates of the obligor's performance. For all other 
securities, you must perform your own detailed analysis of credit 
quality. In doing so, you must consider, as appropriate, the interest 
rate, credit, liquidity, price, transaction, and other risks associated 
with the investment activity and determine that such investment is 
appropriate for your institution. You must also determine that the 
obligor has adequate resources and willingness to provide for all 
required payments on its obligations in a timely manner.

    Dated: December 11, 2001.
    By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 01-31052 Filed 12-20-01; 8:45 am]
BILLING CODE 6720-01-P