Source: https://www.ots.treas.gov/topics/community-affairs/resource-directories/public-welfare-investments/common-part-24-questions.html
Timestamp: 2018-02-19 11:59:26
Document Index: 4053128

Matched Legal Cases: ['art 24', 'art 24', 'art 3', 'art 24', 'art 24', 'art 24', 'art 24', 'art 24', 'art 24', 'art 24', 'art 24', 'art 24', '§ 24', '§ 84', '§24', '§24', '§ 84']

OCC: Community Affairs: Common Part 24 Questions
How should a national bank (“bank”) calculate capital and surplus under 12 CFR 24?
A bank’s tier 1 and tier 2 capital; plus
The balance of a bank’s allowance for loan and lease losses not included in the bank's tier 2 capital.
A bank’s tier 1 and tier 2 capital as well as the allowance for loan and lease losses for purposes of calculating capital and surplus must be established as reported in the bank's Consolidated Reports of Condition and Income (“call report”) as filed under 12 USC 161. Twelve CFR 3.10 provides the methodologies to calculate capital and risk-based capital.
Part 24 cross-references the regulatory capital definition in 12 CFR Part 3 of tier 1 and tier 2 capital as the basis for defining capital and surplus. The OCC’s revised regulatory capital rules, adopted in 2013, tighten the definition of what may count towards a bank’s capital and surplus by revising the definitions of tier 1 and tier 2 capital. As of January 1, 2015, the definitions of tier 1 and tier 2 capital are applicable with respect to the calculation of capital and surplus.1
Tier 1 capital is reported in the bank’s call report on Schedule RC-R — Regulatory Capital, line 26 "Tier 1 capital."
Tier 2 capital is reported on Schedule RC-R — Regulatory Capital, line 34, "Tier 2 capital." The balance of a bank’s allowance for loan and lease losses not included in the bank’s Tier 2 capital is calculated as follows: Subtract line 30 in Schedule RC-R — Regulatory Capital ("Allowance for loan and lease losses includable in Tier 2 capital") from the sum of:
"Allowance for loan and lease losses" reported on schedule RC — Balance Sheet on line 4.c., less
"Allocated transfer risk reserve included in Schedule RI-B, part II, item 7" included in Memorandum item 1 on Schedule RI-B, part II — Changes in Allowance for Loan and Lease Losses, plus
"Allowance for credit losses on off-balance sheet credit exposures" in Line 3 of Schedule RC-G — Other Liabilities.
Call Report “Capital and Surplus”:
“Capital and Surplus” from a legal perspective is equivalent to the sum of tier 1 capital plus tier 2 capital plus the disallowed portion of allowance for loan and lease losses and is the sum of the call report figures (below).
Here is the formula for capital and surplus from the call report. Each line item in the call report has a corresponding code. The amounts associated with each code should be used in the formula below.2
RCOA/RCFA 8274
RCOA/RCFA 5311
RCON/RCFD 3123
Allowance for loan and lease losses includable in Tier 2 Capital
RCOA/RCFA 5310
RIAD C435
RCON B557
1 The definitions of tier 1 and tier 2 capital became applicable for banks subject to the advanced approaches rule on January 1, 2014.
2 The call report codes referenced here are correct as of August 21, 2015.
How do the 2008 revisions to the statutory language of 12 U.S.C. 24 (Eleventh), providing that national banks may “make investments directly or indirectly, each of which is designed primarily to promote the public welfare, including the welfare of low- and moderate-income communities or families (such as by providing housing, service, or jobs), apply when a national bank makes an investment (1) directly, or (2) indirectly?
When a national bank makes an investment directly into a project or makes an investment into a subsidiary CEDE, which in turn invests funds in a project, each project in which the bank or the subsidiary CEDE invests must primarily promote the public welfare (such as by providing housing, service, or jobs), including the welfare of low- and moderate-income communities or families, or other areas targeted by a governmental entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (the Community Reinvestment Act regulations) as a “qualified investment.”
If a bank does not control the CEDE in which it invests, the CEDE will not be considered a subsidiary for purposes of 12 USC 24 (Eleventh). When a national bank makes an investment in a non-subsidiary CEDE, the CEDE's activities, in the aggregate (as opposed to each project), must primarily promote the public welfare, including the welfare of low- and moderate-income communities or families, or other areas targeted by a governmental entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (the Community Reinvestment Act regulations) as a “qualified investment.”
How would a bank demonstrate that an area has been targeted for redevelopment by a government entity to meet the 12 CFR 24’s public welfare requirement (section 24.3)?
Section 24.3 sets forth the general test for determining whether an investment qualifies as a public welfare investment that national banks may make under 12 CFR 24. One of the four alternative tests for a qualified public welfare investment is that it primarily benefits “other areas targeted by a governmental entity for redevelopment.”
A bank that uses “other areas targeted by a government entity for redevelopment” as the basis for making its 12 CFR 24 investment may consider keeping documentation that indicates: that the governmental entity or agency has designated the area; the redevelopment criteria for the area; how the public welfare investment is consistent with the governmental entity’s or agency’s plans; and the type of financing and other support that the governmental entity or agency provides to the area or project in which the bank invests.
12 CFR 24 permits a national bank to make an investment if the investment is designed primarily to promote the public welfare, including the welfare of low- and moderate-income persons or low- and moderate-income areas, or other areas targeted by a governmental entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (the Community Reinvestment Act regulations) as a “qualified investment.” A typical use of the public welfare investment authority is for a bank's equity investment in a limited partnership or fund that develops and operates affordable housing qualifying for federal low-income housing tax credits. Other examples of qualifying public welfare investments are found in section 24.6.
A national bank may make a public welfare investment under 12 CFR Part 24, if the investment primarily promotes the public welfare, including the welfare of low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a government entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (CRA) as a “qualified investment.”
The 2005 revisions to the CRA regulations modified the definition of “community development” to make bank activities to revitalize or stabilize designated disaster areas eligible for CRA consideration. Thus, a national bank may make an investment under 12 CFR Part 24 for any community development activity that revitalizes or stabilizes a designated disaster area.
An activity will be presumed to revitalize or stabilize a designated disaster area if it helps to attract new, or retain existing, businesses or residents and is related to disaster recovery. A “designated disaster area” is a major disaster area designated by the federal government. Investments in recovery-related activities designed to revitalize or stabilize a designated disaster area generally must be made within 36 months after the date of designation. Where there is demonstrable community need to extend the period for recognizing revitalization or stabilization activities in a particular disaster area to assist in long-term recovery efforts, this time period may be extended. For the areas impacted by hurricanes Katrina and Rita, this time period will be extended.
How do the 2005 changes to the CRA regulations concerning distressed nonmetropolitan middle-income geographies expand opportunities for public welfare investments
A national bank may make a public welfare investment under 12 CFR Part 24, if the investment primarily promotes the public welfare including the welfare of low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a government entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (CRA) as a “qualified investment.” The 2005 revisions to the CRA regulations modified the definition of “community development” to make bank activities to revitalize or stabilize distressed nonmetropolitan middle-income geographies eligible for CRA consideration. An activity revitalizes or stabilizes a distressed nonmetropolitan middle-income geography if it helps to attract new or retain existing businesses or residents. An activity will be presumed to revitalize or stabilize the area if the activity is consistent with a bona fide government revitalization or stabilization plan. Thus, a national bank may make an investment under 12 CFR Part 24 for any community development activity that revitalizes or stabilizes a distressed nonmetropolitan middle-income geography. A listing of such geographies is available on the FFIEC Web site at http://www.ffiec.gov.
A national bank may make a public welfare investment under 12 CFR Part 24, if the investment primarily promotes the public welfare including the welfare of low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a government entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (CRA) as a “qualified investment.” The 2005 revisions to the CRA regulations modified the definition of “community development” to make bank activities to revitalize or stabilize underserved nonmetropolitan middle-income geographies eligible for CRA consideration. An activity revitalizes or stabilizes an underserved nonmetropolitan middle-income geography if it helps to meet essential community needs, including the needs of low- or moderate-income individuals. Thus, a national bank may make an investment under 12 CFR Part 24 for any community development activities that revitalizes or stabilizes an underserved nonmetropolitan middle-income geography. A listing of such geographies is available on the FFIEC Web site at http://www.ffiec.gov.
The OCC determined, in the 2003 revisions to 12 CFR 24 (Part 24), that a national bank investment in a new markets tax credit Community Development Entity qualifies as public welfare investment. Since then, several national banks have asked whether in all instances, an investment in a Community Development Entity created in conjunction with the New Markets Tax Credit Program must use the public welfare investment authority and be subject to the capital and surplus requirements. The short answer is: No. Below are some questions and guidance to help you better determine when a bank can use another authority.
Under section 24.7(b), that a national bank must maintain in its files information adequate to demonstrate that its 12 CFR 24 investments meet the public welfare standard set out in section 24.3, and that the bank is otherwise in compliance with public welfare investment requirements. The bank's file on each Part 24 investment should be readily accessible for examination. If the OCC imposes one or more conditions on its approval of a Part 24 investment,
For public welfare public welfare requirements, the documentation should indicate that the investment satisfies at least one of the public welfare criteria in section 24.3. These criteria are that the bank's investment is designed primarily to promote the public welfare including the welfare of low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a governmental entity for redevelopment, or if the investment would receive consideration under 12 CFR 25.23 (the Community Reinvestment Act regulations) as a “qualified investment.” Information describing activities funded by the bank's investment and indicating how they are consistent with the activities described in the bank's after-the-fact notification or prior approval request and any supplemental materials or clarifications may help to establish that the public welfare requirement has been met.
As a general matter, files also should contain copies of all correspondence with the OCC, including correspondence pertaining to particular investments and to the percentage of capital and surplus that the bank may invest under 12 CFR 24. For example, if the bank's aggregate public welfare investments are greater than 5 percent of its capital and surplus, the bank's file should contain the OCC's letter that permits the bank to exceed the 5
As a general rule, a national bank's aggregate outstanding investments under 12 CFR 24 may not exceed 5 percent of its capital and surplus. If the bank is at least adequately capitalized, it may make a written request to the OCC to exceed the 5 percent limit. OCC may provide a written approval allowing a higher amount of a bank’s aggregate public welfare investments up to a maximum level of 15 percent of capital and surplus, if the increase will not pose a significant risk to the deposit insurance fund.
Is not subject to any written agreement, order or capital directive, or prompt corrective action directive issued by the OCC pursuant to section 8 of the FDI Act, the International Lending Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act, or any regulation thereunder, to meet and maintain a specific capital level for any capital measure.
What are OCC’s guidelines for public welfare investments in minority- and women-owned banks and thrifts under 12 CFR 24?
A national bank may make a public welfare investment under 12 CFR 24, if the investment is designed primarily to benefit low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a government entity for redevelopment, or the investment would receive consideration under 12 CFR 25.23 (CRA) as a "qualified investment.” A 1992 amendment to the Community Reinvestment Act (CRA) authorizes the banking agencies, when evaluating a bank’s CRA performance, to consider capital investments undertaken by the institution in cooperation with minority- and women-owned financial institutions provided that these activities help meet the credit needs of local communities in which such institutions are chartered. Consequently, national banks may make investments under 12 CFR 24 in minority- and women-owned banks and thrifts that serve the local communities in which they are chartered. National banks may also make public welfare investments in minority- and women-owned banks and thrifts that are CDFI Fund certified Community Development Financial Institutions or are community development focus national banks chartered by the OCC.
Is the investment authority contained in 12 U.S.C.§ 24(Eleventh) separate and distinct from the lending limits provided in 12 U.S.C. § 84?
The OCC’s regulations at 12 C.F.R. §24.1(d) provide that “national banks that make loans or investments that are designed primarily to promote the public welfare and that are authorized under provisions of the banking laws other than 12 U.S.C. 24(Eleventh), may do so without regard to the provisions of 12 U.S.C. 24(Eleventh) or this part.” Consequently, the investment authority of 12 U.S.C. §24(Eleventh) should be considered as separate and independent of from the lending limits of 12 U.S.C. § 84. However, while both of these sources of legal authority are potentially available, banks must be mindful of the safety and soundness issues that arise with undue concentrations in their exposure to one entity. Banks should have systems and controls in place to monitor and control their credit concentrations. Excessive exposure to any given entity is an unsafe and unsound practice and the OCC retains the right to criticize such an exposure. For additional information, see OCC Interpretive Letter #1076 (December 2006).
1 Pub. L. 110-289, 122 Stat. 2,654 (July 30, 2008).
2 Pub. L. 109-351, 120 Stat. 1,966 (Oct. 13, 2006).