[Federal Register Volume 59, Number 236 (Friday, December 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30160]


[[Page Unknown]]

[Federal Register: December 9, 1994]


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FEDERAL RESERVE SYSTEM
12 CFR Part 208

[Regulation H; Docket No. R-0838]

 

Membership of State Banking Institutions in the Federal Reserve 
System

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is amending its Regulation H to implement a 
provision of the Depository Institutions Disaster Relief Act of 1992 
that authorizes state member banks to make investments designed 
primarily to promote the public welfare to the extent permissible under 
state law and subject to regulation by the Board. The amendment would 
permit state member banks to make certain public welfare investments 
without prior approval and other public welfare investments with 
specific Board approval. The amendment also addresses the procedural 
aspects of these investments.

EFFECTIVE DATE: January 9, 1995.

FOR FURTHER INFORMATION CONTACT: Stephanie Martin, Senior Attorney 
(202-452-3198), Legal Division; Sandra Braunstein, Manager for 
Community Affairs, (202-452-3378), Division of Consumer and Community 
Affairs; Larry Cunningham, Supervisory Financial Analyst, Division of 
Banking Supervision and Regulation (202-452-2701); for users of the 
Telecommunications Device for the Deaf (TDD) only, Dorothea Thompson 
(202-452-3544); Board of Governors of the Federal Reserve System, 
Washington, DC 20551.

SUPPLEMENTARY INFORMATION: The Depository Institutions Disaster Relief 
Act of 19921 amended the Federal Reserve Act2 to loosen the 
restriction on the ability of state member banks to purchase, sell, 
underwrite, and hold investment securities. The amendment allows state 
member banks to make investments that are designed primarily to promote 
the public welfare. The investment must not violate state law or expose 
the bank to unlimited liability. The aggregate of the bank's public 
welfare investments must not exceed the sum of five percent of the 
bank's capital stock actually paid in and unimpaired and five percent 
of its unimpaired surplus fund. The Board may waive this limit by 
order, on a case-by-case basis, and permit a bank to make investments 
in an amount not exceeding the sum of ten percent of the capital stock 
actually paid in and unimpaired and ten percent of the unimpaired 
surplus fund of the bank. Finally, the Board must limit a bank's 
investments in any one project.
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    \1\Pub. L. 102-485, 106 Stat. 2771, 2774, section 6(b).
    \2\Section 9, paragraph 23 (12 U.S.C. 338a).
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    In the past, the Board has dealt with requests by state member 
banks to make public welfare investments on a case-by-case basis. To 
reflect the recent Federal Reserve Act amendment and to facilitate 
public welfare investments by state member banks, the Board is amending 
Regulation H (12 CFR Part 208) by adding a new section entitled 
Community Development and Public Welfare Investments. This amendment 
will permit state member banks to make certain public welfare 
investments without prior approval.

Summary of Final Rule

    The final rule identifies classes of public welfare investments 
that do not require prior approval, leaving less common investments and 
investments of more than five percent of a bank's capital stock and 
surplus subject to case-by-case review. Under the final rule, a state 
member bank may make an investment, without prior approval, if the 
investment previously has been determined to be a public welfare 
investment by the Board or the Comptroller of the Currency or is an 
investment in a community development financial institution as defined 
in the Community Development Banking and Financial Institutions Act of 
1994.3 In addition, the rule allows state member banks to invest 
without prior approval in an entity established solely to engage in one 
or more of the following activities: low- and moderate-income housing; 
nonresidential real-estate development in a low- or moderate-income 
area that is targeted towards low- and moderate-income persons; small 
business development in a low- or moderate-income area; job training or 
placement for low- and moderate-income persons; job creation in a low- 
or moderate-income area for low- and moderate-income persons; and 
technical assistance and credit counseling to benefit community 
development.
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    \3\Title I of Pub. L. 103-325, 108 Stat. 2160, section 103(5).
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    The final rule uses the Department of Housing and Urban 
Development's (HUD's) Chapter 69 Community Development definition of 
low- and moderate-income persons and the Small Business 
Administration's definition of small business. Low- or moderate-income 
area is defined as an area in which the median family income is less 
than eighty percent of the median family income of the Metropolitan 
Statistical Area, or, for non-metropolitan areas, the state.
    Under the final rule, the investment must not violate state law or 
expose the bank to unlimited liability. The rule limits aggregate 
public welfare investments without prior approval to up to five percent 
of the capital stock and surplus of the state member bank and limits 
any single investment without prior approval to not more than two 
percent of a bank's capital stock and surplus. In addition, to make 
public welfare investments without prior approval, a state member bank 
must be at least adequately capitalized and rated a composite CAMEL 
``1'' or ``2'' and at least ``satisfactory'' in its last consumer 
compliance examination. In addition, the bank must not be subject to 
any written agreement, cease and desist order, capital directive, or 
prompt corrective action directive issued by the Board or a Federal 
Reserve Bank acting under delegated authority. A state member bank must 
receive Board approval before making an investment that falls outside 
of the rule's parameters. In no event may aggregate public welfare 
investments exceed ten percent of the bank's capital stock and surplus.
    Within 30 days after making a public welfare investment without 
prior approval, a state member bank must advise its Reserve Bank of the 
amount of the investment and the identity of the entity in which the 
investment is made. If a bank has a preexisting public welfare 
investment on the rule's effective date that would not require prior 
approval under the rule, the bank must notify its Reserve Bank of the 
investment within sixty days after the effective date of the rule. For 
other preexisting public welfare investments, the bank must apply to 
the Board for approval of the investment within one year after the 
rule's effective date.
    If a public welfare investment ceases to meet the statutory 
requirements or any requirements established by the Board in granting 
approval, the bank must divest itself of the investment to the extent 
that the investment ceases to meet those requirements. This divestiture 
is governed by the same requirements as divestitures of interests 
acquired by a lending subsidiary of a bank holding company or a bank 
holding company itself in satisfaction of a debt previously contracted. 
(See 12 CFR Sec. 225.140.) Divestiture is not required if the 
investment ceases to meet the non-statutory requirements concerning 
capital, examination ratings, and enforcement actions.

Summary of Comments and Section-by-Section Analysis

    The Board proposed amendments to Regulation H regarding public 
welfare investments by state member banks in May 1994 (59 FR 27247, May 
26, 1994). The Board received nine public comments on the proposed 
rule: four from trade associations, three from community development 
organizations, and two from bank holding companies. The public comments 
and the Board's responses to the comments are discussed in the section-
by-section analysis below.

Section 208.21(a)(1)

    Definition of low- and moderate-income area. The Board proposed to 
define ``low- and moderate-income area'' as an area in which the median 
family income is less than eighty percent of the median family income 
of the Metropolitan Statistical Area, or, for non-metropolitan areas, 
the state. One commenter stated that ``low- and moderate-income area'' 
should include disadvantaged areas designated by statute as requiring 
special government assistance that might not qualify under the proposed 
definition.
    The Board has addressed the concern that the proposed rule's 
coverage was too narrow by amending Sec. 208.21(b)(1) to broaden the 
universe of investments that are permissible without prior approval. 
(This amendment is discussed below.) The Board has adopted the 
definition as proposed.

Section 208.21(a)(2)

    Definition of low- and moderate-income person. The proposed rule's 
definition of ``low- and moderate-income person'' incorporated the 
definition in Chapter 69 of the HUD statute on community development. 
One commenter supported use of the HUD standard of 80% of median income 
in defining the upper limit for qualifying investments. The Board has 
adopted the proposed definition, with a minor citation correction.

Section 208.21(a)(3)

    Definition of small business. The Board proposed to incorporate the 
definition of ``small business'' as it applies to entities eligible for 
financial or other assistance under the Small Business Administration's 
Small Business Investment Company and Development Company programs. The 
Board received no public comments on this definition and has adopted it 
as proposed.

Section 208.21(b)(1)(i)-(iii)

    Investments not requiring prior approval. The proposed rule 
provided that state member banks could make an investment without prior 
approval if the Board has determined the investment is a public welfare 
investment or if the entity in which the bank invests engages solely in 
one or more specified community development activities.
    One commenter stated that the proposed standards were narrower than 
the Federal Reserve Act's requirements and could exclude public-purpose 
projects and mixed use projects where low- and moderate-income 
residents are only some of the project's beneficiaries, particularly in 
rural areas where low- and moderate-income families are not 
concentrated.
    In the final rule, the Board has broadened the scope of investments 
that are permissible without prior approval. Specifically, a state 
member bank may invest in an entity if the Comptroller of the Currency 
(OCC) has determined, by order or regulation, that investment in that 
entity by a national bank is a public welfare investment under section 
5136 of the Revised Statutes (12 U.S.C. 24). This provision will 
provide greater consistency in investments that are permissible for 
state member banks and national banks and will eliminate the need in 
many cases for determinations by two regulatory agencies. In addition, 
under the final rule a state member bank may, without prior approval, 
invest in a community development financial institution as defined in 
section 103(5) of the Community Development Banking and Financial 
Institutions Act of 1994. Congress has found that community development 
financial institutions play an important role in promoting economic 
revitalization and development in troubled communities and has 
established a special fund to invest in and assist these institutions. 
Therefore, the Board believes that investment in community development 
financial institutions by state member banks should be considered 
public welfare investments.
    Additionally, under Sec. 208.21(d), the Board could make a general 
determination for investments in entities engaged in a particular 
activity. For example, if the Board determined that an investment in an 
entity engaged in development activities in a federally-specified 
enterprise zone was a permissible public welfare investment, it might 
also determine that an investment in any similar entity engaged in 
similar activities would not require prior approval.
    Two commenters argued that the proposed restrictions were too 
broad. These commenters stated that the prior approval exemption should 
be provided only for those investments that address the needs of low- 
and moderate-income persons and communities in ways not readily 
available through the private market. These commenters suggested that 
the Board add criteria similar to those in the OCC's rules on public 
welfare investments. These commenters also suggested that a qualifying 
public welfare investment should be required to include nonbank 
community involvement to ensure that low- and moderate-income community 
residents will benefit from the investment.
    Generally, the ability to obtain funds in the private market is a 
matter of price rather than access. The rate at which funding in the 
private market would be prohibitive would vary with each project and 
would be difficult to specify in a rule of general application. In 
addition, the Board believes that the community development projects 
described by the rule will usually have some form of community support. 
The Board believes that any benefit in requiring a showing of non-bank 
community involvement in a project would be outweighed by the 
additional regulatory burden involved.
    One commenter requested that the Board clarify that investments may 
be made in either non-profit or for-profit community development 
projects without prior approval. The final rule does not distinguish 
between non-profit and for-profit investments. Either type of 
investment is permissible as long as it meets the rule's requirements.

Section 208.21(b)(1)(iv)

    The proposed rule provided that a state member bank could invest 
without prior approval in an entity that engages solely in one or more 
specified community development activities.
    Engaged solely. Two commenters stated that requiring an entity to 
engage solely in one of the specified activities is too restrictive. 
The commenters noted that many companies invest in community 
development but are diverse and multi-functional. One commenter 
suggested that the Board substitute ``primarily'' for ``solely.'' The 
Board believes that the term ``primarily,'' which could be interpreted 
to mean 51 percent or even lower, is not narrow enough for purposes of 
investments without prior approval. If a state member bank wishes to 
invest in an entity that does not engage solely in the listed 
activities, it may ask for a Board determination that the investment is 
a public welfare investment. The Board has retained the ``solely'' 
language in the final rule.
    Where the Board used the term ``primarily'' in the proposed rule, 
it intended to cover those projects targeted towards low- and moderate-
income persons. The Board has substituted the phrase ``targeted 
towards'' for ``primarily'' in the final rule (Sec. 208.21(b)(1)(iv) 
(B) and (D)).
    Indirectly engaged. One commenter asked that the Board clarify 
whether the rule covers investment in a firm that engages in enumerated 
activities through a wholly-owned subsidiary. The Board believes that 
investment in an entity that engaged solely in the listed activities 
through one or more subsidiaries would be permissible. The Board has 
revised the final rule (Sec. 208.21(b)(1)(iv)) to clarify this point.
    Lending activity. The Board has revised the rule to allow 
investments without prior approval in entities engaged solely in public 
welfare lending activities.

Section 208.21(b)(1)(iv)(A)

    Investments in low- and moderate-income housing. The Board proposed 
to allow investment without prior approval in entities that are engaged 
in certain activities related to low- and moderate-income housing. The 
Board specifically requested comment on whether low- and moderate-
income housing should be defined as housing where a majority of the 
units are occupied by low- and moderate-income persons (as proposed) or 
whether the definition should be based on other federal programs, such 
as the low-income housing credit in section 42 of the Internal Revenue 
Code. The Board received six public comments on this issue.
    Three commenters supported the test proposed by the Board. One of 
these commenters stated that section 42 of the Internal Revenue Code 
should apply only if a corporation makes an investment in a housing 
project specifically to benefit from a low-income housing tax credit. 
Another of these commenters suggested that the rule's definition of 
low- and moderate-income housing reflect the current HUD definition, 
which stratifies the definition further to include very low income 
designations.
    One commenter stated that requiring a majority of residential units 
to be occupied by low- and moderate-income persons would tend to 
segregate the poor from people who could help them prosper. This 
commenter suggested that the test should be satisfied by any housing 
``occupied by low- to moderate-income persons,'' or if necessary, 
including a low occupation threshold amount such as 15 percent.
    Two commenters suggested that a qualifying investment should meet 
the ``majority of units'' requirement as well as a requirement that 
either (1) at least 20 percent of the units be occupied by individuals 
whose incomes do not exceed 50 percent of area median income, or (2) at 
least 40 percent of the units be occupied by individuals whose incomes 
do not exceed 60 percent of the area median income, adjusted for family 
size. The commenters believed that the additional restriction (which is 
based on the definition of ``low-income housing project'' in the 
Internal Revenue Code) would insure that qualifying investments would 
provide a minimum level of benefit to low-income persons.
    The Board believes that the additional restrictions on the test for 
low- or moderate-income housing would not provide sufficient 
flexibility in the final rule. However, the Board believes that tax 
credits could provide a powerful incentive for banks to invest in low-
income housing. Therefore, the Board has adopted a revised version of 
the low- and moderate-income housing provision that would allow 
investment in residential property in which a majority of the units are 
occupied by low- or moderate-income persons or that meets the 
definition of a qualified low-income building under section 42 of the 
Internal Revenue Code.

Section 208.21(b)(1)(iv)(B)

    Investments in nonresidential real property. The Board proposed to 
allow investment without prior approval in entities that are engaged in 
certain activities related to nonresidential real property or other 
assets located in a low- or moderate-income area and to be used 
primarily by low- and moderate-income persons. Two commenters strongly 
supported the inclusion of this category. Other than the revision to 
the term ``primarily,'' the Board has adopted this provision as 
proposed.

Section 208.21(b)(1)(iv)(C)

    Small businesses in low- or moderate-income area. The Board 
proposed to allow investment without prior approval in entities that 
invest in small businesses located in a low- or moderate-income area to 
stimulate economic development. Two commenters suggested that the Board 
add emphasis on minority small businesses, which are an especially 
underserved segment of the small business community. The Board believes 
it would be difficult to determine what criteria to use to identify 
disadvantaged small businesses and has not adopted this suggestion.
    One commenter stated that the Board should permit investments in 
all small businesses, as such investments would stimulate economic 
development regardless of whether the businesses are located in low- or 
moderate-income areas. The expansion of the types of investment 
permissible without prior approval (Sec. 208.21(b)(1) (ii) and (iii)) 
should help address the concerns raised by this commenter. The Board 
has adopted the provision as proposed.

Section 208.21(b)(1)(iv) (D) and (E)

    Job training and employment opportunities. The Board proposed to 
allow investment without prior approval in an entity that (i) invests 
in, develops, or otherwise assists job training or placement facilities 
or programs that will be used primarily by low- and moderate-income 
persons or (ii) invests in an entity located in a low- or moderate-
income area if that entity creates long-term employment opportunities, 
a majority of which will be held by low- and moderate-income persons. 
The Board received no public comments on these provisions. Other than 
the revision to the term ``primarily,'' the Board has adopted these 
provisions as proposed.

Section 208.21(b)(1)(iv)(F)

    Investments in credit counseling. The Board proposed to allow 
investment without prior approval in entities that provide technical 
assistance, credit counseling, research, and program development to 
low- and moderate-income persons, small businesses, or nonprofit 
corporations to help achieve community development. Two commenters 
strongly supported the inclusion of this category. The Board has 
adopted this provision as proposed.

Section 208.21(b)(2)

    Permitted by state law. The Board proposed to allow investments 
without prior approval only if the investment is permitted by state 
law. The Board received no public comments on this provision and has 
adopted it as proposed.

Section 208.21(b)(3)

    Limited liability. The Board proposed to allow investments without 
prior approval only if the investment will not expose the bank to 
liability beyond the amount of the investment. The Board received no 
public comments on this provision and has adopted it as proposed. This 
provision would preclude a state member bank from acting as a general 
partner. A general partner is normally liable for all of the debts of 
the partnership, which could be greater than the partner's investment.

Section 208.21(b) (4) and (5)

    Percentage of capital limitation. The Board proposed to allow 
investments without prior approval only if the investment does not 
exceed the sum of two percent of the bank's capital stock and surplus 
and if the aggregate all such investments of the bank does not exceed 
the sum of five percent of its capital stock and surplus. The Board 
received no comments on this provision and has adopted it as proposed.
    Definition of capital. The Board proposed to define capital stock 
and surplus as it is defined in a Board interpretation on state member 
bank undivided profits (12 CFR Sec. 250.162). One commenter suggested 
that the Board define capital and surplus as total Tier 1 and Tier 2 
capital, plus that balance of a bank's allowance for loans and lease 
losses not included in Tier 1 and Tier 2 capital. The commenter stated 
that this information can be easily gleaned from call report, would 
ease compliance, and would be consistent with the OCC's proposed 
definition of capital and surplus for purposes of lending limits. The 
Board believes that the capital definition suggested by the commenter 
is broader than anticipated by the ``capital and surplus'' language of 
the statute. For many years, rules establishing limitations on the 
activities of state member banks in terms of a bank's capital structure 
have used a well-established definition of capital stock and surplus 
that includes undivided profits plus allowance for loan and lease 
losses. As these items are readily ascertained from the Schedule RC 
Balance Sheet report (total equity capital (line 28); allowance for 
loan and lease losses (line 4b), the Board has adopted the definition 
of capital and surplus as proposed.

Section 208.21(b) (6)-(8)

    Requirements regarding bank condition. The Board proposed to allow 
investments without prior approval only if the bank is well capitalized 
or adequately capitalized, received a composite CAMEL rating of ``1'' 
or ``2'' as of its most recent examination, and is not subject to any 
written agreement, cease and desist order, capital directive, or prompt 
corrective action directive issued by the Board or a Federal Reserve 
Bank.
    One commenter stated that CAMEL 3-rated institutions do not pose 
the same risks to safety and soundness as 4- and 5-rated institutions. 
The commenter suggested that an improving 3-rated institution with 
adequate capital should be able to request a waiver from the Board to 
forego the application process for future public welfare projects 
(consistent with the OCC's public welfare investment rule). The Board 
believes, however, that it would need to review a 3-rated bank's status 
upon each public welfare investment request to determine whether the 
bank was improving and that a blanket application waiver for improving 
3-rated banks would not be appropriate.
    The Board has made two revisions to the proposed provision. First, 
the Board has expanded this provision to preclude investment without 
prior approval by banks operating under a memorandum of understanding. 
Second, the final rule will require a bank to have overall ratings of 
at least ``satisfactory'' from its most recent consumer compliance 
examination in order to make a public welfare investment without prior 
approval.

Section 208.21(c)

    Notice to Reserve Bank. The Board proposed to require a bank that 
made an investment without prior approval to notify its Federal Reserve 
Bank within 30 days of making the investment. The proposed notice would 
include the amount of the investment and the identity of the entity in 
which the investment is made. The Board received no public comments on 
this provision and has adopted it as proposed.

Section 208.21(d)

    The Board proposed that a state member bank would be able to make 
public welfare investments other than those specified in the regulation 
with prior Board approval.
    Scope of public welfare investments. One commenter suggested that 
the Board provide further guidance as to the boundaries of public 
welfare investments that are not directly related to low- and moderate-
income communities or families. The Board's expansion of investments 
permissible without prior approval should address this commenter's 
concerns.
    Application procedures. Three commenters suggested that the rule 
should address application procedures and time limits for public 
welfare investments. The Board has added provisions to Sec. 208.21(d) 
to describe the minimum information that a public welfare investment 
request should contain in order to enable the Board to determine 
whether the investment would meet the Federal Reserve Act's 
requirements. The final rule also provides that the Board will normally 
act on requests within 60 days, unless the Board notifies the bank that 
a longer period is necessary. Accordingly, a bank should request Board 
approval of a public welfare investment at least 60 days prior to the 
day the bank wishes to make the investment.

Section 208.21(e)

    Divestiture. The Board proposed that a bank must divest itself of 
an investment made in accordance with the regulation to the extent that 
the investment exceeds the scope of, or ceases to meet, the 
requirements of the regulation. The Board proposed that the divestiture 
be made in the manner specified in Regulation Y for interests acquired 
by a lending subsidiary of a bank holding company or the bank holding 
company itself in satisfaction of a debt previously contracted. The 
Board received no public comments on this provision and has adopted it 
as proposed.

Section 208.21(f)

    Preexisting investments. Under the Board proposal, if a state 
member bank has an ongoing public welfare investment that would not 
require prior approval under the regulation and was made prior to the 
rule's effective date, the bank must notify its Federal Reserve Bank of 
the investment within 60 days after the effective date. For other 
ongoing investments made prior to the rule's effective date, the bank 
must request Board approval within one year of the effective date. The 
Board received no public comments on these provisions and has adopted 
them as proposed.

Other Comments

Community Reinvestment Act

    Three commenters requested that the Board address the relationship 
between the proposed rule and banks' obligations under the Community 
Reinvestment Act (CRA). One commenter was concerned that the new 
investment levels would be interpreted as mandatory for state member 
banks by some community groups and requested that the Board clarify the 
role such investments should play in bank's overall CRA program. 
Another commenter believed that public welfare investments should be 
considered in assessment of a bank's CRA compliance in order to 
encourage bank participation in lending consortia outside the bank's 
delineated service area. A third commenter stated that the types of 
investments envisioned in this rule should not supplant the bank's 
responsibilities under the CRA.
    The Board has determined not to refer to the CRA in this 
regulation. The requirements of the CRA will continue to apply to state 
member banks. Public welfare investments that are authorized under this 
regulation may or may not qualify for CRA ``credit,'' depending on the 
nature of the investment and the requirements of the CRA.

Regulation Y

    Two commenters urged the Board to adopt a corresponding 
interpretation to Regulation Y (12 CFR Part 225) so that the treatment 
of bank holding companies and state member banks will be consistent. 
The Board has adopted an interpretation to Regulation Y, published 
elsewhere in today's Federal Register.

Capital Treatment

    One commenter requested that the Board address the capital effects 
of this proposal. The Board believes that public welfare investments 
should not receive special accounting, capital, or examination 
treatment.

Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 605(b)), the Board certifies that the amendments to Regulation H 
will not have a significant economic impact on a substantial number of 
small entities, and that any impact on those entities should be 
positive. The amendments will reduce the regulatory burden for many 
state member banks by permitting them to make certain investments that 
had previously required Board approval, and will have no effect in 
other cases.

Paperwork Reduction Act

    In accordance with section 3507 of the Paperwork Reduction Act of 
1980 (44 U.S.C. 3507), the information collection has been reviewed by 
the Board under the authority delegated to the Board by the Office of 
Management and Budget (5 CFR Part 1320, Appendix A) after consideration 
of the comments received during the public comment period.
    The collections of information in this regulation are in 12 CFR 
208.21. This information is required to allow oversight of state member 
banks while permitting them to make certain public welfare investments. 
This information will be used to track public welfare investments and 
approve or deny certain new investments.
    The estimated annual burden per respondent varies from 2 to 10 
hours, depending on individual circumstances, with an estimated average 
of 2.3 hours. There will be an estimated thirty-five respondents filing 
investment notifications, averaging 2 hours, an estimated fifteen 
respondents filing applications, averaging 2.5 hours, and an estimated 
two respondents filing divestiture notifications, averaging 5 hours.

List of Subjects in 12 CFR Part 208

    Accounting, Agriculture, Banks, Banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

    For the reasons set forth in the preamble, the Board is amending 12 
CFR Part 208 as set forth below:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for Part 208 continues to read as 
follows:

    Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461, 
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105, 
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 
78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318.

    2. A new Sec. 208.21 is added to Subpart A to read as follows:


Sec. 208.21  Community development and public welfare investments.

    (a) Definitions--(1) Low- or moderate-income area means:
    (i) One or more census tracts in a Metropolitan Statistical Area 
where the median family income adjusted for family size in each census 
tract is less than eighty percent of the median family income adjusted 
for family size of the Metropolitan Statistical Area; or
    (ii) If not in a Metropolitan Statistical Area, one or more census 
tracts or block-numbered areas where the median family income adjusted 
for family size in each census tract or block-numbered area is less 
than eighty percent of the median family income adjusted for family 
size of the State.
    (2) Low- and moderate-income persons has the same meaning as low- 
and moderate-income persons as defined in 42 U.S.C. 5302(a)(20)(A).
    (3) Small business means a business that meets the size eligibility 
standards of 13 CFR 121.802(a)(2).
    (b) Investments that do not require prior Board approval. 
Notwithstanding the provisions of section 5136 of the Revised Statutes 
(12 U.S.C. 24 (Seventh)) made applicable to State member banks by 
paragraph 20 of section 9 of the Federal Reserve Act (12 U.S.C. 335), a 
State member bank may make an investment, without prior Board approval, 
if the following conditions are met:
    (1) The investment is in a corporation, limited partnership, or 
other entity:
    (i) Where the Board has determined that an investment in that 
entity or class of entities is a public welfare investment under 
paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a), 
or a community development investment under Regulation Y (12 CFR 
225.25(b)(6));
    (ii) Where the Comptroller of the Currency has determined, by order 
or regulation, that an investment in that entity by a national bank is 
a public welfare investment under section 5136 of the Revised Statutes 
(12 U.S.C. 24 (Eleventh));
    (iii) Where that entity is a community development financial 
institution as defined in section 103(5) of the Community Development 
Banking and Financial Institutions Act of 1994 (12 U.S.C. 4702(5)); or
    (iv) Where that entity, directly or indirectly, engages solely in 
or makes loans solely for the purposes of one or more of the following 
community development activities:
    (A) Investing in, developing, rehabilitating, managing, selling, or 
renting residential property if a majority of the units will be 
occupied by low- and moderate-income persons or if the property is a 
``qualified low-income building'' as defined in section 42(c)(2) of the 
Internal Revenue Code (26 U.S.C. 42(c)(2));
    (B) Investing in, developing, rehabilitating, managing, selling, or 
renting nonresidential real property or other assets located in a low- 
or moderate-income area and targeted towards low- and moderate-income 
persons;
    (C) Investing in one or more small businesses located in a low- or 
moderate-income area to stimulate economic development;
    (D) Investing in, developing, or otherwise assisting job training 
or placement facilities or programs that will be targeted towards low- 
and moderate-income persons;
    (E) Investing in an entity located in a low- or moderate-income 
area if that entity creates long-term employment opportunities, a 
majority of which (based on full time equivalent positions) will be 
held by low- and moderate-income persons; and
    (F) Providing technical assistance, credit counseling, research, 
and program development assistance to low- and moderate-income persons, 
small businesses, or nonprofit corporations to help achieve community 
development;
    (2) The investment is permitted by State law;
    (3) The investment will not expose the State member bank to 
liability beyond the amount of the investment;
    (4) The investment does not exceed the sum of two percent of the 
State member bank's capital stock and surplus as defined under 12 CFR 
250.162;
    (5) The aggregate of all such investments of the State member bank 
does not exceed the sum of five percent of its capital stock and 
surplus as defined under 12 CFR 250.162;
    (6) The State member bank is well capitalized or adequately 
capitalized under Secs. 208.33(b) (1) and (2);
    (7) The State member bank received a composite CAMEL rating of 
``1'' or ``2'' under the Uniform Financial Institutions Rating System 
as of its most recent examination and an overall rating of at least 
``satisfactory'' as of its most recent consumer compliance examination; 
and
    (8) The State member bank is not subject to any written agreement, 
cease and desist order, capital directive, prompt corrective action 
directive, or memorandum of understanding issued by the Board or a 
Federal Reserve Bank.
    (c) Notice. Not more than 30 days after making an investment under 
paragraph (b) of this section, the State member bank shall advise its 
Federal Reserve Bank of the investment, including the amount of the 
investment and the identity of the entity in which the investment is 
made.
    (d) Investments requiring Board approval. (1) With prior Board 
approval, a State member bank may make public welfare investments under 
paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a), 
other than those specified in paragraph (b) of this section.
    (2) Requests for approval under this paragraph should include, at a 
minimum, the amount of the proposed investment, a description of the 
entity in which the investment is to be made, an explanation of why the 
investment is a public welfare investment under paragraph 23 of section 
9 of the Federal Reserve Act (12 U.S.C. 338a), a description of the 
State member bank's potential liability under the proposed investment, 
the amount of the State member bank's aggregate outstanding public 
welfare investments under paragraph 23 of section 9 of the Federal 
Reserve Act, and the amount of the State member bank's capital stock 
and surplus as defined in 12 CFR 250.162.
    (3) The Board will act on a request under this paragraph within 60 
calendar days after receipt of a request that meets the requirements of 
paragraph (d)(2) of this section, unless the Board notifies the 
requesting State member bank that a longer time period will be 
required.
    (e) Divestiture of investments. A State member bank shall divest 
itself of an investment made under paragraph (b), (d) or (f) of this 
section to the extent that the investment exceeds the scope of, or 
ceases to meet, the requirements of paragraphs (b)(1) through (b)(5), 
or paragraph (d) of this section. The divestiture shall be made in the 
manner specified in 12 CFR 225.140, Regulation Y, for interests 
acquired by a lending subsidiary of a bank holding company or the bank 
holding company itself in satisfaction of a debt previously contracted.
    (f) Preexisting investments. (1) For ongoing investments made prior 
to January 9, 1995 that are covered by paragraph (b) of this section, a 
State member bank shall notify its Federal Reserve Bank of the 
investment not more than sixty days after January 9, 1995.
    (2) For other ongoing investments made prior to January 9, 1995, a 
State member bank shall request Board approval not more than one year 
after January 9, 1995.

    By order of the Board of Governors of the Federal Reserve 
System, December 2, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-30160 Filed 12-8-94; 8:45 am]
BILLING CODE 6210-01-P