Source: https://www.ots.treas.gov/topics/consumers-and-communities/community-affairs/resource-directories/public-welfare-investments/common-part-24-questions.html
Timestamp: 2019-10-24 04:15:43
Document Index: 18110474

Matched Legal Cases: ['art 24', 'art 24', 'art 24', 'art 24', 'art 5', '§ 24', '§ 84', '§24', '§24', '§ 84', 'art 24', 'art 24', 'art 24']

Common Part 24 Questions | OCC
After-the-Fact Notification
Calculating Aggregate Outstanding Investments When Determining the 12 CFR 24 Investment Limits
Calculating Capital and Surplus When Determining the 12 CFR 24 Investment Limits
CRA Regulation and Public Welfare Investments
Direct Versus Indirect Investments in CEDEs
Government Targeted Areas
Legal Authority for Community Development Investments
Legal Authority for Investments in Subsidiary Community Development Entities and New Markets Tax Credits
Legal Lending Limits and Public Welfare Investments
Maintaining Investment Files
Minority- and Women-Owned Banks and Thrifts
Requesting an Increase in the Part 24 Investment Limits
What process must a bank follow if it wants to provide after-the-fact notices to the OCC rather than prior approval requests for future investments of more than 5 percent of capital and surplus?
An eligible bank may make most 12 CFR 24 investments without prior notification to, or approval by the OCC if the bank follows the after-the-fact notice procedures described under section 24.5(a). Generally, if an investment meets the public welfare, limited liability, and investment limit requirements, an eligible bank may make the investment and notify the OCC within 10 days after making the investment. Also, the public welfare investment activity must be generally consistent with the list of examples under section 24.6. However, the investment limit requirements do not allow a national bank's aggregate outstanding 12 CFR 24 investments to exceed 5 percent of its capital and surplus without prior written approval.
When a bank's aggregate outstanding 12 CFR 24 investments approach 5 percent of its capital and surplus, if the bank is at least adequately capitalized, it may seek OCC permission to use the after-the-fact notice procedures for investments above the 5 percent investment limit. Regulations finalized in April 2008 changed the requirement that a bank should make that request in connection with seeking prior OCC approval for making an actual public welfare investment.
The new, simpler procedure allows the bank to make a written request to OCC for approval under section 24.4 to exceed the 5 percent limit. If the OCC provides written approval of the request, the bank may make investments above the 5 percent limit, providing after-the-fact notice in accordance with section 24.5 (a) if it satisfies the requirements for after-the-fact notice. The bank's request should be submitted to the Director, Community Development Division, Office of the Comptroller of the Currency, Washington, DC 20219.
The OCC's consideration of the bank's request to use the after-the-fact notice procedures for future investments exceeding 5 percent of capital and surplus will weigh whether the bank is at least adequately capitalized and whether the higher amount will not pose significant risk to the deposit insurance fund. In no event may the bank's aggregate outstanding 12 CFR 24 investments exceed 15 percent of its capital and surplus.
Should a bank use the original balance or the amortized remaining unpaid balance of an investment for establishing the value of the investments "net" of impairments, when determining the percentage of aggregate 12 CFR 24 investments outstanding as a percentage of capital and surplus?
A public welfare investment should be recorded at the amortized remaining unpaid balance at the time when the investment is made or acquired, with adjustments for other than temporary impairment (OTTI). When calculating the aggregate amount of its aggregate outstanding investments under this part, a national bank should follow Generally Accepted Accounting Principles (GAAP), unless otherwise directed or permitted in writing by the OCC for prudential or safety and soundness reasons. The bank should compute these investment limits using call report amounts prepared in accordance with GAAP.
How should a national bank ("bank") calculate capital and surplus under 12 CFR 24?
Under 12 CFR 24.2 capital and surplus means:
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 3 of tier 1 and tier 2 capital as the basis for defining capital and surplus.
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.1
Call Report Field Name
Tier 1 Capital RCOA/RCFA 8274
Tier 2 Capital RCOA/RCFA 5311
Allowance for loan and lease losses RCON/RCFD 3123
Allowance for loan and lease losses includable in tier 2 Capital RCOA/RCFA 5310
Allocated transfer risk reserve RIAD C435
Allowance for credit losses on off-balance sheet credit exposures RCON B557
Capital and Surplus Formula
Capital & Surplus = [8274] + [5311] + [3123] - [5310] - [C435] + [B557]
How did the 2005 changes to the CRA regulations concerning designated disaster areas expand opportunities for public welfare investments (12 CFR 24)?
A national bank may make a public welfare investment under 12 CFR 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 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 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 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 website at http://www.ffiec.gov.
How do the 2005 changes to the CRA regulations concerning underserved nonmetropolitan middle-income geographies expand opportunities for public welfare investments?
A national bank may make a public welfare investment under 12 CFR 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 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 website at http://www.ffiec.gov.
How do the 2008 revisions to the statutory language of 12 USC 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?
This language, which was enacted in the Housing and Economic Recovery Act, effectively restores the public welfare investment test that was in effect prior to enactment of the Financial Services Regulatory Relief Act of 2006 (FSRRA).
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."
The OCC considers a legally incorporated town, city, county, state, tribal, or federal governmental agency or entity to be a governmental entity. Often, a governmental entity or agency designates a neighborhood, district, or other geographic section through a formally adopted redevelopment plan that may include special activities and benefits and funding from public and private sector resources. The activities in those areas typically help to attract and retain businesses and residents. Examples of formally designated redevelopment areas include federal empowerment zones and rural communities, state enterprise zones, or city tax incremental financing (TIF) districts. Investors in those areas may receive tax incentives, such as capital gains relief, wage credits for employees who live and work in those areas, and the ability to expense business investments.
Some 12 CFR 24 investments may not involve formal area designations, but still may be made in an area targeted for redevelopment by a governmental entity. For example, a local government agency may partner with a national bank, chamber of commerce, and community leaders to develop and operate an industrial park to help attract new small businesses and expand employment opportunities for residents. The local government may provide, for example, infrastructure improvements to the industrial park and offer tax abatements to the businesses that locate there.
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.
Must a bank use the 12 CFR 24 investment authority for making all types of community development investments?
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.
Similarly, under 12 USC 24(Eighth), in certain circumstances, a national bank may support community and economic development activities by contributing to community funds, nonprofit community-based organizations and intermediaries, foundations, or other "charitable, philanthropic, or benevolent instrumentalities conducive to public welfare." In addition, a bank may make loans or debt investments that support development activities or purchase community development municipal bonds consistent with the requirements and limitations of 12 USC 24(Seventh).
By using these other investment authorities where appropriate, a national bank may be able to preserve its limited public welfare investment authority.
The OCC determined, in the 2003 revisions to 12 CFR 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.
If a Community Development Entity limits its activities to making loans, can a national bank invest in a Community Development Entity pursuant to other legal authority?
Yes. A national bank may invest in a Community Development Entity either as an operating subsidiary or as a non-controlling equity investment if the requirements in 12 CFR 5.34 or 5.36, respectively, are satisfied. Such investments would not be subject to the limitations of part 24.
What exactly is an operating subsidiary?
An operating subsidiary is a separate corporation, LLC, or similar entity, in which a national bank maintains more than a 50 percent voting or similar type of controlling interest, or otherwise controls the subsidiary and no other party controls more than 50 percent of the voting (or similar type of controlling) interest of the subsidiary. An operating subsidiary may engage in activities that are part of, or incidental to, the business of banking, including the making of loans or other extensions of credit. Operating subsidiaries are governed by 12 CFR 5.34.
Must a bank submit an application or notice to the OCC to establish an operating subsidiary?
Yes, a bank that intends to acquire or establish an operating subsidiary usually must submit an application or notice to the OCC. Well-capitalized and well-managed banks may file under the notice process for the acquisition or establishment of an operating subsidiary that will engage in only "eligible activities." The eligible activities, which are listed in 12 CFR 5.34(e)(5)(v), include making loans or other extensions of credit. If a bank is not well-capitalized and well-managed (or if the proposed activities are not eligible activities), the bank must follow the standard application process for all activities. See "Investment in Subsidiaries and Equities," Comptroller's Licensing Manual, for detailed guidance on the operating subsidiary filing procedures.
Pursuant to Part 5, may a national bank own, either directly or through an operating subsidiary, a non-controlling interest in a Community Development Entity that engages only in eligible activities?
Yes, the OCC permits national banks to own, either directly or through an operating subsidiary, a non-controlling interest in such a Community Development Entity. The Community Development Entity may be a corporation, limited partnership, LLC, or similar entity. Twelve CFR 5.36 provides a notice procedure for well-capitalized and well-managed banks to make certain types of non-controlling investments, including non-controlling investments in entities engaged in the eligible activities listed in 12 CFR 5.34(e)(5)(v). For further details on the information that must be included in a non-controlling investment notice, see 12 CFR 5.36. Also, see OCC Corporate Decision 2011-08 (June 2011).
Is the investment authority contained in 12 USC § 24(Eleventh) separate and distinct from the lending limits provided in 12 USC § 84?
The OCC's regulations at 12 CFR §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 USC 24(Eleventh), may do so without regard to the provisions of 12 USC 24(Eleventh) or this part. "Consequently, the investment authority of 12 USC §24(Eleventh) should be considered as separate and independent of from the lending limits of 12 USC § 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).
What types of information should a bank maintain in its files about its 12 CFR 24 investments?
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.
For part 24's investment limit requirements, a bank should document the dollar amount of the bank's investment, which should be consistent with the information provided in connection with the bank's after-the-fact notice or prior approval request and any supplemental materials or clarifications. Documentation about the nature and legal structure of the investment should demonstrate that the investment does not expose the bank to unlimited liability.
A bank also may consider implementing a system for tracking its public welfare investments (including outstanding commitments) with due attention to investments that have been changed, completed, sold, or otherwise divested, so as to know at any point in time the aggregate outstanding amount of public welfare investments and the percentage of capital and surplus represented by those investments. A tracking system also would enable a bank to notify the OCC of changes in the nature or amount of its public welfare investments, if necessary.
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 percent limit.
What are the 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.
When is a bank eligible to request an increase in the limits on aggregate outstanding public welfare investments?
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.
A bank is adequately capitalized if the bank:
A leverage ratio of 3.0 percent or greater if the bank is rated 1 in the most recent examination of the bank; and
Does not meet the definition of a well capitalized bank.
A bank is well capitalized if the bank:
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 USC 3907), or section 38 of the FDI Act, or any regulation thereunder, to meet and maintain a specific capital level for any capital measure.
1 The call report codes referenced here are correct as of August 21, 2015.
2 Pub. L. 110-289, 122 Stat. 2,654 (July 30, 2008).
3 Pub. L. 109-351, 120 Stat. 1,966 (Oct. 13, 2006).