[Federal Register Volume 61, Number 244 (Wednesday, December 18, 1996)]
[Rules and Regulations]
[Pages 66561-66579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31639]


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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision

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

[No. 96-119]
RIN 1550-AA88


Subsidiaries and Equity Investments

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS or agency) is today 
issuing a final rule updating and substantially streamlining its 
regulations and policy statements concerning subsidiaries and other 
subordinate organizations in which

[[Page 66562]]

savings associations have ownership interests (including operating 
subsidiaries and service corporations) and equity investments 
(including pass-through investments). These amendments are being made 
pursuant to the Regulatory Reinvention Initiative of the Vice 
President's National Performance Review (Reinvention Initiative) and 
section 303 of the Community Development and Regulatory Improvement Act 
of 1994 (CDRIA), which requires OTS and other federal banking agencies 
to review, streamline, and modify regulations and policies to improve 
efficiency, reduce unnecessary costs, and remove inconsistent, outmoded 
and duplicative requirements.

EFFECTIVE DATE: January 1, 1997.

FOR FURTHER INFORMATION CONTACT: Deborah Merkle, Project Manager, 
Supervision Policy, (202) 906-5688; Donna Deale, Manager, Supervision 
Policy, (202) 906-7488; Susan Miles, Senior Attorney, Regulations and 
Legislation Division, (202) 906-6798; Dean Shahinian, Senior Counsel 
for Corporate Activities, Business Transactions Division, (202) 906-
7289; or Deborah Dakin, Deputy Chief Counsel, (202) 906-6445, 
Regulations and Legislation Division, Chief Counsel's Office, Office of 
Thrift Supervision, 1700 G Street, NW., Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Summary of Comments and Description of the Final Rule
    A. General Discussion of the Comments
    B. Section-by-Section Analysis
III. Disposition of Existing Rules
IV. Executive Order 12866
V. Paperwork Reduction Act
VI. Regulatory Flexibility Act Analysis
VII. Unfunded Mandates Act of 1995
VIII. Administrative Procedure Act and Effective Date

I. Background

    Pursuant to section 303 of the CDRIA 1 and the 
Administration's Reinvention Initiative, OTS began a comprehensive 
review of its regulations in the spring of 1995. Early in that process, 
OTS identified its regulations governing operating subsidiaries, 
service corporations and other equity investments as one of the most 
important areas for updating and streamlining. Each regulation in this 
area was reviewed to determine whether it was current and 
understandable; imposed the least possible burden consistent with 
safety and soundness and statutory requirements; addressed subject 
matter more suited for handbook guidance; and was written in a clear, 
straightforward manner. OTS also sought industry input regarding 
staff's initial recommendations through an industry focus group 
consisting of thrift representatives, an industry trade association, 
and OTS staff. The consensus that emerged from this process was that 
regulatory burden could be reduced primarily by enhancing flexibility 
and clarifying investment options available to savings associations, 
including operating subsidiaries, service corporations, and pass-
through investments.
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    \1\ 12 U.S.C. 4803(a)(1).
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    As a result of this review, OTS identified a number of ways in 
which its regulations could be revised to reduce regulatory burden. On 
June 13, 1996, OTS issued a notice of proposed rulemaking.2 The 
proposal reorganized some regulations into a chart to facilitate 
comparisons of the different types of subordinate organizations; 
replaced several application procedures with more streamlined notice 
requirements; standardized the requirements applicable to pass-through 
investments; revised the list of activities preapproved for thrift 
service corporations; removed regulations dealing with finance 
subsidiaries (which have largely been replaced by operating 
subsidiaries); and restated the regulations in plain language.
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    \2\ 61 FR 29976 (June 13, 1996).
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    Today's final rule is substantially similar to the June proposal, 
but incorporates several changes and clarifications in response to 
comments received.

II. Summary of Comments and Description of the Final Rule

A. General Discussion of the Comments

    The public comment period on the proposal closed on August 12, 
1996. Ten commenters, including six federal savings associations, three 
trade associations, and one mortgage guaranty insurance corporation, 
submitted comments.
    Eight of the ten commenters supported OTS efforts to clarify, 
consolidate, and reorganize these regulations. They agreed that the 
proposed regulatory changes will make it easier to make investments in 
subordinate organizations. Several commenters specifically supported 
the plain language drafting and accompanying chart, stating that these 
changes will be useful and will reduce the burden of compliance with 
the regulations. Most commenters who supported the proposal also made 
suggestions for clarifications and modifications, which are discussed 
in the section-by-section analysis. Two commenters, representing 
current or potential competitors of savings associations or their 
service corporations, urged OTS not to adopt, or to proceed more slowly 
with, changes that would expand the list of preapproved activities for 
service corporations of federal savings associations.

B. Section-by-Section Analysis

New Part 559-Subordinate Organizations
    OTS proposed to adopt a new Part 559, Subsidiaries, that would 
include all of the agency's regulations affecting thrift subsidiaries. 
Commenters generally agreed with OTS's view that this reorganization 
will make it much easier for savings associations to find and use these 
regulations. OTS has retitled this part as ``Subordinate 
Organizations'' in order to avoid potential confusion arising from the 
use of the term ``subsidiary'' both as a generic term for a business 
organization in which a savings association has an ownership interest 
and as a more specific term used to describe a narrower category of 
companies in which the savings association's ownership interest is 
significant enough to give it direct or indirect control. A federal 
savings association's ownership interest in a service corporation may 
not be large enough to make that service corporation a ``subsidiary'' 
of the thrift, but the service corporation is still subject to federal 
regulation under this part because the savings association is an owner 
of the service corporation.
Section 559.1  What Does This Part Cover?
    This section explains the scope of new Part 559 and sets forth 
OTS's basic statutory authority over subordinate organizations. No 
commenters addressed this section, which is adopted as proposed, with 
minor technical corrections.
Section 559.2  Definitions (new)
    As OTS reviewed the comments received on the proposal, it became 
clear that adding a definitional section to Part 559 would help users 
to identify more readily what types of entities are affected by the 
various regulatory provisions. New Sec. 559.2 gathers in one location 
definitions of key terms describing different types of entities in 
which savings associations may invest.

[[Page 66563]]

These definitions are derived in large part from existing regulatory 
definitions. The term ``subordinate organization'' encompasses all 
business organizations in which a savings association has a direct or 
indirect ownership interest except where that ownership interest has 
been acquired through the use of the savings association's pass-through 
investment authority (discussed below). ``Subsidiary'' is defined using 
language taken from the Federal Deposit Insurance Corporation's 
regulations governing notices filed for savings association 
subsidiaries, 12 CFR 303.13(a)(1996). This definition turns primarily 
on whether an association has control of the entity in which it 
invests. For these purposes, OTS will use its standard definition of 
``control,'' which appears in its change-of-control regulations, 12 CFR 
Part 574. ``Operating subsidiary'' is defined as any entity that 
satisfies the operating subsidiary requirements of new Sec. 559.3 and 
is designated as an operating subsidiary by the investing association. 
There are three basic characteristics of an operating subsidiary: (a) a 
majority of its voting shares must be owned by the investing 
association; (b) it must be controlled by the association; and (c) it 
may engage only in activities that are permissible for the association. 
``Service corporation'' is defined as any entity that satisfies the 
service corporation requirements of new Sec. 559.3 and the authorizing 
statute, 12 U.S.C. 1464(c)(4)(B), and is designated as a service 
corporation by the investing association. Service corporations may 
engage in activities reasonably related to the operation of a financial 
institution. However, the amount of funds a federal savings association 
may invest in service corporations is limited (as discussed below). 
``Lower-tier entity,'' a new term, includes all business organizations 
in which an operating subsidiary, service corporation, or other 
subordinate organization has an ownership interest. It includes 
entities often commonly referred to as ``second-tier service 
corporations'' or ``service corporation subsidiaries.'' ``GAAP-
consolidated subsidiary'' is a newly defined term that describes all 
operating subsidiaries and any service corporations or lower-tier 
entities that are consolidated with a savings association for purposes 
of filing reports in accordance with Generally Accepted Accounting 
Principles (GAAP).
Section 559.3 What Are the Characteristics of, and What Requirements 
Apply to, Subordinate Organizations of Federal Savings Associations?
    Section 559.3 (proposed as Sec. 559.2) authorizes federal savings 
associations to establish or acquire operating subsidiaries and service 
corporations. Most of this section takes the form of a chart that lists 
and compares the different characteristics of, and requirements that 
apply to, operating subsidiaries and service corporations (including 
lower-tier entities in which these companies invest). The chart is 
derived in large part from the current regulations at 12 CFR 545.74 
(service corporations) and 545.81 (operating subsidiaries). Where 
appropriate, and for ease of reference, it cross-references other 
applicable OTS regulations that have been the subject of frequent 
questions to the agency. The chart reiterates that, in addition to 
preapproved service corporation activities, a federal thrift may 
continue to apply to OTS for case-by-case approval for a service 
corporation to engage in any activity that is reasonably related to the 
operation of a financial institution.
    Commenters thought the chart would be a comprehensive and concise 
reference source that would make it easier to compare these two 
structures and determine which best fits the association's needs.
    Commenters addressed several substantive areas covered by the 
chart:
Preemption
    The regulation sets forth OTS's long-standing position that state 
law is preempted for operating subsidiaries to the same extent as it is 
for the parent federal savings association. OTS has taken this position 
because an operating subsidiary--which may only engage in activities 
permissible for its parent federal savings association and must be 
controlled by the investing savings association--is treated as the 
equivalent of a department of the parent thrift for regulatory and 
reporting purposes. In the past, OTS has not preempted state law for 
service corporations because service corporations are not so closely 
tied to the parent thrift.
    One commenter asked that we reexamine whether state law should be 
preempted for those service corporations that must be incorporated in 
the state where the parent federal savings association is incorporated 
(commonly referred to as first-tier service corporations). 
Alternatively, this commenter urged that OTS consider relaxing or 
eliminating the requirement that first-tier service corporations (in 
contrast to operating subsidiaries and lower-tier entities) must be 
organized in the state where their parent thrift has its home office. 
The commenter argued that Sec. 5(c)(4)(B) of the Home Owners' Loan Act 
(HOLA) only requires that a service corporation be incorporated in the 
federal savings association's home state where a service corporation is 
owned by more than one savings association.
    Upon review, OTS continues to believe that state law should not be 
preempted for service corporations of federal savings associations to 
the same extent that it has been for federal savings associations and 
their operating subsidiaries. Service corporations engage in activities 
that are related to and promote, but go beyond, those permitted for 
federal savings associations themselves. In contrast, operating 
subsidiaries engage only in activities that could be conducted at the 
parent thrift level. Additionally, unlike an operating subsidiary, a 
service corporation need not be controlled by its parent thrift. 
Moreover, a federal thrift may only invest a small portion of its 
assets in service corporations, while no such limits apply to operating 
subsidiaries. These distinctions make service corporations less 
critical to the operations of federal savings associations. Therefore, 
to date OTS has concluded that broad federal preemption for service 
corporations is not necessary to facilitate the safe and sound 
operation of federal savings associations, to enable federal savings 
associations to conduct their operations in accordance with the best 
practices of thrift institutions in the United States, or to further 
other purposes of the HOLA. Although the agency could promulgate 
preemptive regulations if circumstances warranting federal preemption 
arise, the agency does not believe such circumstances exist at this 
time. Accordingly, service corporations continue to be subject to state 
law except where state law comes into direct conflict with federal law.
    The home-state incorporation restriction that the commenter 
alternatively suggests that OTS relax or eliminate is a statutory 
requirement found at HOLA Sec. 5(c)(4)(B). That section provides that 
federal savings associations may make investments ``in the capital 
stock, obligations, or other securities of any corporation organized 
under the laws of the State in which the Federal savings association's 
home office is located, if such corporation's entire capital stock is 
available for purchase only by savings associations of such State and 
by Federal savings

[[Page 66564]]

associations having their home offices in such State.'' 3 The most 
natural reading of this language is that a service corporation must 
both: (a) be organized in the parent thrift's home state, and (b) sell 
capital stock only to thrifts that have their home offices in that 
state. This is how OTS and its predecessor have long read the statute. 
OTS does not have the authority to override the statute. Nevertheless, 
OTS would support a statutory change eliminating the home state 
incorporation requirement. In our view, this requirement is an 
unnecessary procedural hurdle with no connection to safety and 
soundness.
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    \3\ 12 U.S.C. 1464(c)(4)(B) (emphasis added).
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Inapplicability of HOLA Section 5(c) Investment Limits to Service 
Corporations
    One trade association commenter representing competitors of federal 
savings associations reiterated a comment it had submitted on OTS's 
Lending and Investment proposal. It argued that OTS should aggregate 
commercial loans made by a federal thrift's service corporation with 
commercial loans made by the thrift itself for purposes of calculating 
investment limits under section 5(c)(2)(A). To do otherwise, it argues, 
would circumvent Congress' intent to establish a ceiling on commercial 
loan activity by savings associations.
    The requirement that a service corporation's commercial loans be 
aggregated with those of the parent thrift to determine compliance with 
the limitation on commercial loans was previously established by OTS 
regulation, not the HOLA. This requirement was removed by the final 
Lending and Investments Rule, effective as of October 30, 1996.4 
As discussed in the preamble to that regulation, the statutory language 
imposing investment limits on commercial lending by savings 
associations nowhere refers to loans made by service 
corporations.5 Similarly, section 5(c)(4)(B) of the HOLA, which 
authorizes investments in service corporations of up to 3% of a 
thrift's assets, does not contain any sublimit on commercial lending by 
service corporations.
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    \4\  61 FR 50951 (September 30, 1996).
    \5\  We also note that on September 30, 1996, following 
publication of the January Lending and Investment proposal setting 
forth OTS's interpretation of HOLA section 5(c)(2)(A), the Economic 
Growth and Regulatory Paperwork Reduction Act of 1996 (``EGRPRA'') 
enhanced the commercial lending authority of federal thrifts under 
HOLA section 5(c)(2)(A), raising it by an additional 10% of assets 
for commercial loans made to small businesses. In amending this 
section, Congress did not in either statutory language or 
legislative history indicate disapproval of OTS's interpretation of 
this provision or the HOLA service corporation provision.
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    Accordingly, as proposed, the chart that appears in Sec. 559.3 
reiterates that loans and investments made by service corporations are 
not subject to the limits that apply to federal savings associations 
under HOLA section 5(c).
Structure of Operating Subsidiaries and Service Corporations
    One commenter specifically supported the provisions in the chart 
that streamline the procedure for converting service corporations to 
operating subsidiaries or operating subsidiaries to service 
corporations. We reiterate that a savings association converting its 
service corporation to an operating subsidiary must be certain that the 
activity is permissible for a federal savings association.
    Two commenters also suggested that the chart should address whether 
an operating subsidiary may be structured as a limited partnership or 
limited liability company (LLC).6 Both of these forms of 
organization limit the liability of their owners to the amount of their 
investment in much the same way as the liability of a stockholder of a 
corporation is limited. While OTS expects that the vast majority of 
operating subsidiaries will continue to be structured as corporations, 
in the interest of increasing federal thrifts' flexibility in 
structuring their operations, the agency has modified the chart by 
removing specific references to ``incorporation''. An operating 
subsidiary must still satisfy the basic requirements of majority 
ownership interest, limited liability, and effective operating control. 
Not all forms of organization will meet those requirements. OTS will 
therefore continue to address requests by thrifts to establish an 
operating subsidiary in a noncorporate form on a case-by-case basis 
through its Sec. 559.11 notice and review process. Organizational forms 
that meet the requirements of the regulation and do not present safety 
and soundness concerns will be permitted.
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    \6\  LLCs are a relatively new form of business organization, 
that have certain advantages of both the corporate and partnership 
forms of ownership. They have become increasingly popular because 
the Internal Revenue Service has allowed LLCs meeting certain 
requirements to be taxed as partnerships.
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    The chart has been similarly amended to give service corporations 
the potential to be organized in other forms. EGRPRA amended the Bank 
Service Corporation Act to confirm that first-tier bank service 
corporations may be established as LLCs. HOLA was not similarly 
amended. Nothing in EGRPRA's legislative history or the legislative 
history of the HOLA addresses whether savings association service 
corporations may be organized as LLCs. Absent such guidance, OTS will 
follow its standard practice of interpreting the HOLA in a manner that 
does not elevate form over substance. Thus, OTS believes the HOLA 
authorization to invest in service corporations should be read to 
permit any organizational form that provides the same basic protections 
as the corporate form of organization, including limited liability. Any 
proposal to organize an LLC or a limited partnership as a first-tier 
service corporation will be carefully reviewed in the Sec. 559.11 
notice process to ascertain whether liability will in fact be limited 
and whether any other safety and soundness concerns are presented.
Consolidation of Operating Subsidiaries with Their Parent Savings 
Associations
    One commenter urged OTS to amend the chart to allow for waiver of 
the requirement that operating subsidiaries are generally consolidated 
with their parent thrift for purposes of investment authority and other 
regulatory requirements. OTS does not believe that a specific waiver 
provision is necessary. OTS regulations already provide, at 12 CFR 
500.30(a), that the OTS Director ``may, for good cause and to the 
extent permitted by statute, waive the applicability of any provision 
of this chapter.'' That provision covers all OTS regulations except for 
those containing statutorily mandated provisions. Because the operating 
subsidiary form of organization is permitted by, but not specifically 
addressed in OTS's statutory authority over federal savings 
associations, most requirements governing operating subsidiaries are 
not mandated by statute. OTS will review any requests to waive a 
consolidation requirement on a case-by-case basis to determine whether 
good cause exists.
    OTS has also modified provisions of the chart summarizing the 
capital and Qualified Thrift Lender (QTL) requirements to reflect 
changes made to the underlying regulations in this or other recently 
adopted OTS regulations. Other technical, non-substantive changes have 
been made to make the chart easier to understand.
Section 559.4  What Activities Are Preapproved for Service 
Corporations?
    This section (proposed as Sec. 559.3) replaces the list of 
preapproved activities found in current Sec. 545.74(c). This section 
does not purport to list all possible activities that may be 
permissible for service corporations of federal savings associations, 
but only

[[Page 66565]]

those that have been preapproved and may be conducted by well-run 
institutions upon notice to OTS. Other unlisted activities that are 
reasonably related to the operation of financial institutions will be 
considered on a case-by-case basis upon application to OTS.
    The proposal revised the list of preapproved activities to:
     Affirm that any activity a federal thrift may conduct 
directly, except deposit-taking, is preapproved for a service 
corporation, when conducted in the same manner as allowed at the 
federal savings association level. This includes all activities listed 
in the HOLA and Part 560, as well as other incidental powers addressed 
in OTS legal opinions and guidance.
     Include certain activities that the OTS already routinely 
approves on a case-by-case basis.
     Allow business and professional activities that involve 
financial documents, financial clients, or are generally finance-
related to be performed for any person.
     Permit a limited number of services that have not been 
previously authorized, but are reasonably related to the operation of a 
financial institution and have been permitted for bank operating 
subsidiaries or bank service corporations.
    Three commenters thought the proposed additions to the list of 
preapproved activities for service corporations would be helpful in a 
variety of ways: business plans could be developed more efficiently; 
uncertainty over whether activities are permissible would be 
eliminated; and, as a result, federal savings associations could 
function more efficiently.
    One commenter requested that the agency clarify that the presence 
of an activity on the list of preapproved activities does not 
necessarily imply that federal savings associations cannot conduct the 
activity directly. This is correct, but it should also be noted that 
the activities listed in the regulation may be conducted without being 
subject to the same limits that apply to the parent federal savings 
association except where specifically provided. For example, service 
corporations may perform some services for third parties that the 
federal savings association may only perform for itself.
    One trade association commenter representing competitors of savings 
associations argued that the proposed regulation would expand the 
activities permissible for service corporations too far. It only 
supported the modification of preapproved activities to include those 
previously authorized and permitted for bank operating subsidiaries or 
bank service corporations. This commenter also objected to permitting 
preapproved ``financial-related'' or ``credit-related'' activities to 
be performed for anyone (rather than only primarily for financial 
institutions), and characterized the proposal's changes as 
``substantive modifications that go beyond regulatory burden 
reduction.''
    OTS does not agree. The effect of today's amendments is not to 
expand the scope of permissible service corporation activities. The 
service corporation regulation has never purported to list all 
``permissible'' activities of service corporations of federal savings 
associations, but only those ``preapproved.'' Under both the current 
and the new regulation, federal savings associations may apply to OTS 
for approval of any proposed service corporation activity that is 
``reasonably related'' to the activities of federal savings 
associations and other financial institutions.7 OTS believes that 
once it has become familiar with an activity and determined that it is 
``reasonably related,'' the activity should be added to the preapproved 
list. No purpose is served by requiring well-run institutions to file 
applications (rather than notices) to engage in these activities, pay 
higher fees, and wait for agency approvals. Today's action merely 
reduces the procedural hurdles that service corporations of well-run 
federal savings associations must scale before engaging in certain 
permissible activities by replacing application requirements with 
notice requirements.
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    \7\ See the introductory text to current 12 CFR 545.74(c)(1996). 
See also Sec. 559.3(e)(2)(i) of today's final rule.
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    Of course, savings associations may continue to apply to OTS for 
case-by-case approval for their service corporations to engage in 
activities not on the preapproved list, or for the service corporation 
to provide services to a broader range of customers than those 
specified for some categories of activities on the preapproved list.
    Today's additions to the preapproved list will place federal 
thrifts on a more level playing field with competitors (including non-
depository financial institutions) by allowing thrift service 
corporations to engage in profitable businesses that do not carry 
significant risks and that may be synergistic with the core thrift 
business.
Mortgage Insurance
    OTS requested comment on whether service corporations should be 
permitted to engage in activities related to private mortgage insurance 
(mortgage insurance). As part of its recent Conflicts of Interest, 
Corporate Opportunity, and Hazard Insurance rulemaking,8 OTS has 
removed Sec. 563.44 of its regulations, which had significantly limited 
the mortgage insurance activities of federal savings associations and 
their subordinate organizations, by, among other things, limiting the 
circumstances under which a savings association could insure any loan 
with a mortgage insurance company in which it had a significant direct 
or indirect interest.
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    \8\ 61 FR 60173 (November 27, 1996).
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    One trade association commenter urged OTS not to make underwriting 
mortgage insurance a preapproved activity for service corporations and 
to proceed with caution in allowing service corporations to enter the 
mortgage insurance business. This commenter believed that mortgage 
insurance underwriting presents different risks than other insurance 
products because, among other reasons, it is non-cancelable, its 
premium is fixed for the duration of the policy, and it covers the 
riskiest type of single-family mortgage. If underwriting mortgage 
insurance is permitted, this commenter believed OTS should require an 
application, separate capitalization of the subsidiary, and arms' 
length transactions.
    A second commenter urged OTS to make underwriting of captive 
mortgage reinsurance (``CMR'') (reinsurance solely of loans originated 
by an affiliated federal savings association and insured by a primary 
mortgage insurance provider) a preapproved activity. This commenter 
pointed out that the mortgage insurance industry is a highly regulated 
industry subject to comprehensive state and federal insurance 
regulatory requirements and oversight, as well as the ongoing scrutiny 
of the mortgage lending industry and secondary markets. The commenter 
specifically did not address the direct underwriting of mortgage 
insurance or general reinsurance of mortgage insurance.
    Based on this commenter's description of CMR, it appears that CMR 
could be an activity ``reasonably related to the activities of 
financial institutions.'' At this point, however, OTS believes that the 
underwriting of captive mortgage reinsurance and other mortgage 
insurance-related activities should be considered on a case-by-case, 
rather than a preapproved, basis. This is consistent with the approach 
OTS has generally taken when authorizing new service corporation 
activities in order to

[[Page 66566]]

gain additional supervisory experience with a particular business over 
time before prescribing standards for preapproval. A savings 
association that is interested in conducting reinsurance activity 
through a service corporation may file an application with the agency 
describing how it would propose to conduct the activity and what 
safeguards it would put in place.
    In addition to the activities listed as preapproved in the 
proposal, the final rule adds two activities that the Federal Reserve 
Board, on September 6, 1996, proposed to authorize for bank holding 
companies: (1) finance-related management consulting and management 
consulting for financial institution clients; and (2) printing and 
selling checks and related documents. If the Federal Reserve's rule is 
adopted in final form, these activities will automatically become 
authorized for bank service corporations by operation of 12 U.S.C. 
1864(f).
    In its proposal, OTS signalled its intent to review activities 
authorized for bank service corporations in making additions to the 
preapproved list. Although the two activities described above have not 
yet been adopted in final form by the Federal Reserve Board, they are 
clearly ``reasonably related'' to the business of financial 
institutions and, unlike the reinsurance activities described above, do 
not require significant capital or present other novel issues. 
Accordingly, the two activities have been added to the preapproved 
list.
Section 559.5  How Much May a Savings Association Invest in Service 
Corporations or Lower-Tier Entities?
    Proposed Sec. 559.4 (now Sec. 559.5) replaced Sec. 545.74(d), and 
reiterated that a federal savings association may invest in the 
aggregate 3% of its assets in one or more service corporations as long 
as the excess investment over 2% serves primarily community, inner 
city, or community development purposes. The proposal simplified the 
rules governing when a federal savings association may make loans to 
service corporations separate from the 3% of assets limit. Under the 
proposal, the only restrictions were that such additional loans: (1) be 
authorized elsewhere under the HOLA; (2) satisfy applicable percentage 
of assets limits (e.g., 10-20% of assets for commercial loans); and (3) 
comply with the loans-to-one-borrower (LTOB) regulation.
    Commenters generally agreed that the proposal would significantly 
condense and simplify the rules governing when a federal savings 
association may make loans to service corporations separate from the 3% 
of assets limit. Two commenters supported the proposed changes to these 
limits, believing that simplification would help institutions operate 
more efficiently. One thought the proposed changes would enhance growth 
opportunities without undermining the parent's safety and soundness and 
allow greater flexibility within multiple service corporation 
structures.
    Two commenters, however, expressed concern with the requirement 
that loans by a thrift to its service corporations and lower-tier 
entities comply with the LTOB regulation. They argued that under the 
current regulation, some institutions are making loans in a safe and 
sound manner, not posing significant concentration risks, and are 
exceeding the thrift's LTOB limits. After reviewing the commenters' 
concerns, we agree that there are better ways to promote the goals of 
limiting and prudently diversifying the risks presented by savings 
associations' loans to subordinate organizations. In fashioning a final 
rule, we looked at not only the protections provided by LTOB, but also 
those afforded by the capital regulation and the HOLA section 5(c) 
investment limits.
    The final rule continues to allow federal thrifts the flexibility 
to place loans to service corporations or lower-tier entities in either 
the HOLA section 5(c)(4)(B) investment category (service corporation 
investments), or another applicable HOLA investment category (e.g., 
HOLA section 5(c)(2)(A)'s commercial lending authority), provided they 
have available capacity in the chosen category. Section 559.5 does not 
further limit the amount of such loans to a thrift's GAAP-consolidated 
subsidiaries (regardless of whether such GAAP-consolidated subsidiaries 
are service corporations or lower-tier entities). OTS believes that 
there is no need to impose separate limits on loans to GAAP-
consolidated subsidiaries for several reasons. First, if the GAAP-
consolidated subsidiary is engaged only in activities permissible for a 
national bank, its structure and risk are the equivalent of those of a 
traditional national bank operating subsidiary. Pursuant to 12 CFR 
32.1(c), a national bank's loans to its operating subsidiaries are not 
subject to lending limits. Second, if the GAAP-consolidated subsidiary 
is engaged in activities that are not permissible for a national bank, 
the savings association must deduct its entire debt and equity 
investment in calculating its core capital under 12 CFR 
567.5(a)(2)(iv), regardless of the authority under which such 
investments are made. As a result, even if the thrift were to lose its 
entire investment, there would be no adverse impact on its regulatory 
capital compliance. This provides assurance that such loans, if made, 
will not adversely affect the viability of a federal savings 
association. Therefore, we do not believe that any additional 
limitations under Sec. 559.5 are necessary for GAAP-consolidated 
subsidiaries.
    For subordinate organizations that are not GAAP-consolidated 
subsidiaries, Sec. 559.5 has been revised from the proposal to impose a 
limit of 15% of the thrift's total capital on loans to any one 
subordinate organization. The regulation further imposes a 50% of total 
capital aggregate limit on loans to all subordinate organizations that 
are not GAAP-consolidated subsidiaries. By contrast, the proposed rule 
would have subjected all loans to a service corporation (even if GAAP-
consolidated) and to its lower-tier entities to an aggregate 15% of 
capital limit.
    To determine compliance with the ``15/50'' limits of the final 
rule, a thrift's loans to the subordinate organization must be 
aggregated with loans made by any GAAP-consolidated subsidiary to that 
subordinate organization. The Regional Director may modify the 15/50 
limits on a case-by-case basis for safety and soundness reasons.
    One commenter requested clarification that the additional loan 
authority is a separate authority from the HOLA section 5(c)(4)(B) 
investment authority, and not something that is limited to situations 
where that authority has been exhausted. This is correct.
    A commenter requested that, where an entity may be considered 
either a service corporation or a pass-through entity under Sec. 560.32 
(discussed below), OTS clarify that the investment could be apportioned 
between the two authorities. OTS's longstanding position remains that 
investments that are authorized under two or more separate provisions 
of law may be made under either provision, or allocated between both 
provisions, to the extent that the savings association has remaining 
investment authority available under the applicable limits.

Subpart B--Regulations Applicable to All Savings Associations

Section 559.10  How Must Separate Corporate Identities be Maintained?
    This section describes what a savings association and its 
subordinate organizations must do to establish and maintain separate 
identities. The purpose for these requirements, derived

[[Page 66567]]

from current Secs. 545.81(f), 563.37, and 571.21, is to reduce the 
potential for customer confusion or for a court to hold the parent 
liable for the subordinate organization's conduct or obligations. Two 
commenters specifically supported this section. One of these commenters 
noted generally, however, that corporate separateness should not 
unnecessarily restrict the ability to advertise and cross-market 
products. OTS does not believe that the continuation of these long-
standing requirements will in any way hamper the ability of a savings 
association and its subordinate organizations to advertise or cross-
market each other's products. The section is being adopted as proposed.
Section 559.11  What Notices Are Required to Establish or Acquire a New 
Subsidiary or Engage in New Activities Through an Existing Subsidiary?
    This section combines and streamlines the overlapping notice 
requirements currently contained in Secs. 545.74(b)(2), 545.81(c), and 
563.37(c). Two commenters expressly supported the streamlined notice 
and application procedures. This section is being adopted as proposed.
Section 559.12  How May a Subsidiary of a Savings Association Issue 
Securities?
    OTS proposed this section to replace current Sec. 563.132, 
requiring that a savings association notify OTS before a subsidiary 
issues securities. The proposed section also incorporated requirements 
from current Sec. 545.82 (finance subsidiaries of federal savings 
associations) requiring that securities issued by all subsidiaries 
indicate that they are not covered by federal deposit insurance and may 
not be called or accelerated in the event of the savings association's 
insolvency.
    One commenter requested clarification that Sec. 559.12 does not 
apply to securities issuances to the parent or for a subsidiary's own 
corporate needs (as compared to issuing securities to a third party and 
forwarding the proceeds to the parent), arguing that such issuances 
were not covered by Sec. 563.132 or Sec. 545.82 and that applying the 
regulation to such issuances would increase regulatory burden. OTS has 
reexamined the scope of not only Secs. 563.132 and 545.82, but also the 
notice requirements of new Sec. 559.11, which requires savings 
associations to provide OTS with 30-days advance notice before 
conducting a new activity in a subsidiary. OTS has always considered 
the issuance of securities to be an activity covered by these 
provisions. Issuance of securities by a subsidiary, especially if the 
parent savings association expects to transfer any assets or make any 
guarantees in connection with the issuance, is a matter of which the 
regulator needs to be aware.
    Upon review, however, OTS believes that its supervisory concerns 
can be satisfied by receiving initial notice that the subsidiary will 
be issuing securities. The more detailed reporting requirements of 
proposed Sec. 559.12 have been replaced by a less burdensome 
recordkeeping requirement so that the examination process can 
thereafter monitor the actual securities issuances. Accordingly, a 
savings association must notify OTS under Sec. 559.11 before it 
initially issues securities through a subsidiary, regardless of the 
purpose to which the proceeds will be put. Thereafter, no further 
notices are required, but savings associations and their subsidiaries 
should maintain records of their securities issuances under Sec. 559.12 
available for review by OTS examiners for as long as the securities are 
outstanding. Section 559.12 has been modified accordingly.
Section 559.13  How May a Savings Association Exercise its Salvage 
Power in Connection With its Service Corporation or Lower-Tier 
Entities?
    This section replaces the application procedure for salvage 
investments of current Sec. 563.38 with a 30-day notice requirement. In 
its notice, an institution must fully document its additional 
investment in a service corporation or a lower-tier entity in a manner 
that demonstrates how its action is consistent with safety and 
soundness and document other salvage alternatives considered. If the 
agency has concerns, it may take objection to, or grant conditional 
approval of, a notice to exercise such salvage power. One commenter 
expressly supported the change to a notice requirement.
    This section is being adopted as proposed, with one modification. 
Language is being added to emphasize that investments made using 
salvage power authority are, as they have always been, considered 
investments for purposes of the capital regulation. Thus, for example, 
a salvage investment in a nonincludable subsidiary would be deducted in 
calculating the thrift's capital.
Amendments to Part 560--Lending and Investment
    OTS also proposed to add certain provisions dealing with 
subordinate organizations and equity-related investments, such as 
service corporations, pass-through investments and de minimis 
investments to Part 560, Lending and Investments. These additions will 
make that part a comprehensive resource for users seeking information 
on federal savings associations' lending and investment authorities.
Section 560.30  General Lending and Investment Powers for Federal 
Savings Associations
    In the interest of completeness, OTS proposed to add several 
equity-related investments to the lending and investment powers chart 
contained in this regulation. Investments in the following entities are 
being added as proposed: Small business investment corporations 
chartered pursuant to Sec. 301(d) of the Small Business Act; open-end 
management investment companies; and service corporations. The chart 
has also been modified to reflect recent statutory amendments enhancing 
and clarifying federal savings associations' educational, credit card, 
and small business lending authority enacted as part of EGRPRA. 
Finally, the chart is being amended to clarify that liquidity 
investments are authorized under 12 U.S.C. 1464(c)(1)(M) as long as 
they are of a type that would qualify as liquid asset investments under 
12 CFR part 566. The maturity limitations of that part generally do not 
affect this authorization. This carries forward language from former 12 
CFR 545.71 that was inadvertently omitted from the final lending and 
investment rule when liquidity investments were added to the chart.
Section 560.32  Pass-Through Investments
    This new section codifies federal savings associations' authority 
to invest in entities, such as limited partnerships and mutual funds, 
that hold only assets, and engage only in activities, permissible for 
federal savings associations. By clarifying the rules applicable to 
pass-through investments, this section enhances savings associations' 
access to this investment option. The section also establishes uniform 
safety and soundness constraints, ensuring that the OTS is aware of, 
and has the opportunity to object to, any move by a thrift to place 
significant amounts of its assets under the operating control of third 
parties.
    A federal savings association's ability to make pass-through 
investments is derived from the same incidental authority pursuant to 
which it invests in operating subsidiaries. Pass-through entities 
differ from operating subsidiaries, however, in that a thrift

[[Page 66568]]

must have majority ownership of an operating subsidiary but may not 
control a pass-through entity. Unlike a service corporation, which is 
usually structured as a corporation and which may potentially engage in 
a broader range of activities than a federal savings association, pass-
through investments (except for investments made primarily in order to 
use a corporation's services under Sec. 560.32(b)(5)(v)) may take the 
form of stock investments only with special approval from OTS and may 
only be made in entities that engage in activities that a federal 
savings association could conduct directly.
    Investments that satisfy the conditions enumerated in this section 
will not require advance notice to OTS. A savings association must 
provide written notice to OTS before making any pass-through investment 
that does not meet those standards. OTS will review these notices and 
may object or impose conditions for supervisory, legal, or safety and 
soundness reasons.
    Loans that a savings association makes to an entity in which it has 
made a pass-through equity investment will be subject to the LTOB rule 
in the same manner as loans by a savings association to any third 
party. Absent particular safety and soundness concerns, such loans will 
not be aggregated with pass-through equity investments made pursuant to 
this section for purposes of either LTOB restrictions or restrictions 
under this section.
    Commenters supported codifying pass-through investments because the 
requirements would be more clearly set forth and the approval process 
would be more predictable.
    One commenter requested that OTS confirm that the restrictions 
applicable to pass-through investments do not apply to operating 
subsidiaries. A thrift's investment in its operating subsidiary is not 
subject to the restrictions set forth in this section. Pass-through 
investments made by an operating subsidiary would, however, be subject 
to this section.
    Two commenters argued that LLCs should be a preapproved structure 
for pass-through investments. OTS agrees that LLCs should be a 
preapproved pass-through investment structure, as they offer a number 
of benefits to thrifts while containing adequate safeguards. Consistent 
with other preapproved entities, LLCs are generally structured to 
provide a thrift with limited liability equal to the amount invested. 
OTS believes that by preapproving this structure for potential pass-
through investments, thrifts will enjoy greater flexibility and a lower 
regulatory burden, especially in the community development area.
Section 560.36  De minimis investments
    This section (proposed as Sec. 560.33) specifically confirms that a 
federal savings association may make de minimis equity investments in 
community organizations in which national banks may invest. Total 
investments made under this section may not exceed the greater of \1/4\ 
of 1% of an association's total capital or $100,000.
    Two commenters argued that OTS should increase the permissible 
investment for well-capitalized, CAMEL 1- or 2-rated institutions to 5% 
of capital, in the aggregate, so long as deducting the investment from 
capital would not cause the institution to fall into a lower capital 
category and up to 10% of capital on application to OTS. This would 
parallel limits for national banks under 12 U.S.C. 24 (Eleventh) and 12 
CFR part 24.
    The HOLA does not contain a provision paralleling the authority of 
12 U.S.C. 24 (Eleventh). However, OTS and its predecessor have long 
recognized that a federal savings association's incidental powers 
include the ability to make charitable contributions that assist its 
community. New Sec. 560.36 allows thrifts to contribute to their 
communities by making equity investments in community organizations 
that do not exceed what they could otherwise generally directly 
contribute and deduct for tax purposes. Because this is a new 
regulation and federal thrifts have other community development 
investment options not available to national banks, OTS is not inclined 
to increase the de minimis limit at this time.
    In this regard, we note that federal thrifts may, in addition to 
the de minimis authority set forth under this section, make community-
related investments through their 3% of assets service corporation 
investment authority. The HOLA, in fact, requires that a thrift wishing 
to take full advantage of its authority to invest up to 3% of its 
assets in service corporations must dedicate at least 1% of those 
assets to investments promoting community, inner-city, or community 
development purposes. Additional investments may also be possible using 
an operating subsidiary, lower-tier entity, or pass-through investment. 
Accordingly, this section is adopted as proposed, with the limits 
proposed.

Amendments to Other Regulatory Sections

Section 545.74  Service Corporations
    The bulk of this section has been incorporated into new part 559, 
Subordinate Organizations. The one exception is the safeguards that 
apply to securities brokerage activities of service corporations, which 
have been governed by 12 CFR 545.74(c)(4). OTS proposed to amend this 
paragraph to remove a prohibition against savings associations 
contracting with third parties for securities brokerage activities, but 
to otherwise leave it unchanged while the agency considered whether to 
incorporate this paragraph into part 559 or to modify the safeguards 
and apply them to all securities sales programs taking place on thrift 
premises by any entity, including service corporations, affiliates, and 
third party broker-dealers.
    One commenter addressed this issue. The commenter supported the 
removal of the prohibition on federal savings associations contracting 
with third parties for securities brokerage activities, but argued that 
all of Sec. 545.74(c)(4) duplicates existing regulations and 
interagency guidelines and should be removed. At this point, the agency 
has decided to deal with the broader issues of securities sales on 
association premises, including sales by service corporations, as part 
of a later rulemaking. This comment will be considered as part of that 
rulemaking. Accordingly, Sec. 545.74(c)(4) is being amended and 
retained as Sec. 545.74, ``Securities Brokerage,'' to better reflect 
its new scope.
Section 545.77  Real Estate for Offices and Related Facilities
    This section was not addressed in the proposal. It sets forth 
federal savings associations' incidental authority to acquire real 
estate for their current and anticipated future office needs. The 
section is being recodified as new Sec. 560.37 without substantive 
change.
Section 545.82  Finance Subsidiaries
    The proposal proposed to remove this section and to deem all 
existing finance subsidiaries to be operating subsidiaries. All of the 
functions performed by finance subsidiaries may already be done with 
fewer restrictions by an operating subsidiary. The two commenters 
addressing this section supported the proposal. Accordingly, 
Sec. 545.82 is being deleted.
Section 560.93  Lending Limitations
    This section is being amended in connection with the amendments 
made today to new Sec. 559.5. Under the current

[[Page 66569]]

section, a thrift's loans to its subsidiaries (defined as 5% or greater 
ownership) or affiliates are not subject to the LTOB limitations of 
this section. Loans by a thrift or any of its subsidiaries to a third 
party are aggregated, however, for purposes of this section. As 
amended, the section will generally not apply to loans made by a 
savings association to any of its subordinate organizations as the 
amount of such loans is governed by new Sec. 559.5.9 As presently, 
it will also not apply to loans made to an affiliate of the savings 
association, as the amount of those loans continues to be governed by 
Sec. 563.41. Loans by a savings association or any of its subsidiaries 
(now defined as entities of which the savings association has direct or 
indirect control) to a third party are subject to this section.
---------------------------------------------------------------------------

    \9\ Loans that a thrift makes to a third party that invests in 
the thrift's subordinate organization will be aggregated with any 
loans by the thrift to that subordinate organization in accordance 
with the combination rules that generally apply under the LTOB 
regulation.
---------------------------------------------------------------------------

Section 563.41  Loans and Other Transactions With Affiliates and 
Subsidiaries
    OTS proposed to modify the definition of ``subsidiary'' in 
Sec. 563.41 to mirror the statutory definition of section 23A of the 
Federal Reserve Act, 12 U.S.C. 371c, rather than the OTS capital 
regulation. The statutory definition turns on control, whereas the 
capital regulation was based on a 5% ownership interest. No commenters 
addressed this issue, but one commenter requested that OTS allow 
sister-bank treatment between a thrift subsidiary and sister thrift. 
Consistent with staff interpretations of the Federal Reserve, OTS has 
interpreted the sister-bank exemption to be available between a thrift 
subsidiary and sister thrift, provided the transaction would be covered 
by the sister-bank exemption if conducted by the parent thrift of the 
subsidiary.
    The definition of ``subsidiary'' in Sec. 563.41 is being modified 
as proposed.
Part 567--Capital
    OTS proposed to simplify the calculation of investments in 
subsidiaries for capital purposes by changing the definition of 
``subsidiary'' in Sec. 567.1(dd) from 5% ownership to more than 50% 
ownership, paralleling the treatment of subsidiaries by the other 
federal banking agencies, and by removing language that defined 
investments in subsidiaries in a manner that has resulted in savings 
associations holding disproportionate amounts of capital against risks 
presented by investments made in some lower-tier entities. Two 
commenters supported these changes, stating that they would reduce 
regulatory burden. OTS is adopting these changes as proposed with one 
modification. Instead of referring to an ownership interest of 50% or 
greater, the regulation will refer to ownership interests that would be 
consolidated under GAAP. These are generally majority investments, so 
this change will not affect most savings associations. However, this 
modification will help to reduce confusion in the limited situations 
where GAAP, which is used as the basis for reporting under the Thrift 
Financial Report that savings associations file quarterly with OTS, 
uses a different standard than majority ownership.

III. Disposition of Existing Rules

------------------------------------------------------------------------
     Original provision           New provision            Comment      
------------------------------------------------------------------------
545.74(a)...................  ....................  Removed.            
545.74(b) introductory text.  560.30..............  Incorporated into   
                                                     lending and        
                                                     investment powers  
                                                     chart.             
545.74(b)(1)................  559.3(e)(2).........                      
545.74(b)(2)................  559.11..............                      
545.74(b)(3)................  559.3(e)(2)(ii).....                      
545.74(b)(4)................  559.3(o)(2).........                      
545.74(b)(5)................  559.1(a)............                      
545.74(c) introductory text.  559.3(e)(2).........                      
545.74(c)(1)-(7) except for   559.4...............                      
 (c)(4).                                                                
545.74(c)(4)................  545.74..............  Modified.           
545.74(d)...................  559.5...............  Substantially       
                                                     revised.           
545.74(e)...................  559.3(q)(2).........                      
545.76(a)...................  560.30..............                      
545.76(b)...................  ....................  Removed.            
545.77......................  560.37..............                      
545.80......................  560.30..............                      
545.81(a)...................  559.3...............                      
545.81(b)...................  559.3(c)(1), (e)(1).                      
545.81(c)(1), (2)...........  559.3(a)(1).........                      
545.81(c)(3)................  559.11..............                      
545.81(d)...................  559.3(p)............                      
545.81(e)...................  559.3(h)(1).........                      
545.81(f)...................  559.10..............                      
545.81(g)...................  559.3(o)(1).........                      
545.81(h)...................  559.1(a)............                      
545.81(i)...................  559.1(b)............  Modified.           
545.81(j)...................  559.3(e)(1).........                      
545.81(k)...................  559.3(p)............                      
545.82......................  ....................  Removed.            
560.93(a)...................  ....................  Modified.           
563.37(a), (b)..............  559.10..............  Modified.           
563.37(c)...................  559.11..............                      
563.38......................  559.13..............  Modified.           
563.41(b)(4)................  ....................  Modified.           
563.132(a), (b).............  ....................  Removed.            
563.132(c)..................  559.12..............  Modified.           

[[Page 66570]]

                                                                        
567.1(l)....................  ....................  Modified.           
567.1(dd)...................  ....................  Modified.           
571.21......................  559.10..............  Modified.           
------------------------------------------------------------------------

IV. Executive Order 12866

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

V. Paperwork Reduction Act

    The reporting requirements at 12 CFR 560.32 have been submitted to 
and approved by the Office of Management and Budget under OMB control 
number 1550-0078. The information is needed by the OTS to assist in 
regulating savings associations and their subsidiaries.
    The final rule differs from the proposal in that 12 CFR 559.12 no 
longer contains the requirement to notify the OTS in writing following 
a securities issuance. The information that would have been contained 
in the notice is now a recordkeeping requirement. At the proposed rule 
stage, the burden attributed to Sec. 559.12, approved under OMB control 
no. 1550-0013, remained unchanged. Since the change from the notice 
requirement to a recordkeeping requirement constitutes a reduction in 
burden, the information collection package under 1550-0013 has been 
submitted to OMB for review.
    Comments on the collections of information should be sent to the 
Office of Management and Budget, Paperwork Reduction Project (1550), 
Washington, DC 20503, with copies to the Office of Thrift Supervision, 
1700 G Street, NW., Washington, D.C. 20552.
    Under the Paperwork Reduction Act of 1995, no persons are required 
to respond to a collection of information unless it displays a valid 
OMB control number. The valid OMB control number assigned to the 
collection of information in this final rule will be displayed in the 
table at 12 CFR 506.1(b).

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 impact on a 
substantial number of small entities. The final rule streamlines 
requirements for all savings associations. It simplifies the 
requirements that apply when savings associations create, invest in, or 
conduct new activities through a variety of subordinate organizations 
or pass-through investments, and clarifies the statutorily required 
notices for such actions. The final rule will make it easier for small 
savings associations to locate the rules that apply to their 
investments.

VII. Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (Unfunded Mandates Act), requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
federal mandate that may result in expenditure by state, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 205 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. As discussed in the preamble, 
this final rule reduces regulatory burden. 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, this rulemaking is not subject to section 202 of the 
Unfunded Mandates Act.

VIII. Administrative Procedure Act and Effective Date

    This final rule results from the notice of proposed rulemaking OTS 
published on June 13, 1996. In addition to the regulatory language 
proposed in that notice, OTS is today redesignating, without 
substantive change, other regulations located in Part 545 into new Part 
559. The chart in Part 560 has also been updated to reflect changes in 
statutory provisions in EGRPRA on September 30, 1996. Pursuant to 
section 553(b) of the Administrative Procedure Act, OTS hereby finds 
that good cause exists not to publish those provisions for public 
notice and comment. These provisions are merely being renumbered and 
updated for the convenience of users, thus public notice and 
opportunity to comment are unnecessary.
    Section 553(d) of the Administrative Procedure Act, 5 U.S.C. 553(d) 
permits an agency to waive the normal 30-day delay in effective date 
when a rule relieves a restriction. OTS finds good cause to make the 
rule effective in fewer than 30 days because the rule imposes no new 
regulatory burdens and relieves restrictions by streamlining 
application and notice requirements.

List of Subjects

12 CFR Part 545

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

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.

12 CFR Part 563

    Accounting, Advertising, Conflicts of Interest, Corporate 
Opportunity, Crime, Currency, Investments, Mortgages, Reporting and 
recordkeeping requirements, Savings associations, Securities, Surety 
bonds.

12 CFR Part 567

    Capital, Savings associations.

12 CFR Part 571

    Accounting, Investments, Reporting and recordkeeping requirements, 
Savings associations.

    Accordingly, and for the reasons set forth in the preamble, the 
Office of Thrift Supervision amends chapter V, title 12, Code of 
Federal Regulations, as set forth below.

PART 545--OPERATIONS

    1. The authority citation for part 545 continues to read as 
follows:

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

    2. Section 545.74 is amended by:
    a. Revising the section heading;
    b. Removing paragraphs (a), (b), the paragraph heading and 
introductory text of paragraph (c), paragraphs (c)(1) through (c)(3), 
paragraph (c)(4)(ii)(F), paragraphs (c)(5) through (c)(7), and 
paragraphs (d) and (e);
    c. Removing the paragraph heading of paragraph (c)(4);

[[Page 66571]]

    d. Redesignating paragraphs (c)(4)(i) introductory text, 
(c)(4)(i)(A) through (c)(4)(i)(E), (c)(4)(ii) introductory text, 
(c)(4)(ii)(A) through (c)(4)(ii)(E), (c)(4)(ii)(G), (c)(4)(iii), and 
(c)(4)(iv) as paragraphs (a) introductory text, (a)(1) through (a)(5), 
(b) introductory text, (b)(1) through (b)(5), (b)(6), (c), and (d), 
respectively;
    e. Revising the introductory text of newly designated paragraph 
(a);
    f. Removing, in newly designated paragraph (b) introductory text, 
the phrase ``this paragraph (c)(4)(ii)'', and by adding in lieu thereof 
the phrase ``this paragraph (b)'';
    g. Removing, in newly designated paragraph (b)(1), the phrase 
``under paragraph (c)(3) of this section'', and by adding in lieu 
thereof the phrase ``Sec. 559.4 of this chapter''; and
    h. Removing, in newly designated paragraph (c), the phrase 
``paragraph (c)(4) of'', wherever it appears.
    The revisions read as follows:


Sec. 545.74  Securities brokerage.

    (a) A service corporation may execute securities transactions on an 
agency or riskless principal basis solely upon the order of and for the 
account of customers, and may provide standardized and individualized 
investment advice to individuals or entities, provided that the service 
corporation:
* * * * *


Secs. 545.76, 545.77, 545.80-545.82  [Removed]

    3. Sections 545.76, 545.77, 545.80, 545.81, and 545.82 are removed.
    4. Part 559 is added to read as follows:

PART 559--SUBORDINATE ORGANIZATIONS

Sec.
559.1  What does this part cover?
559.2  Definitions.

Subpart A--Regulations Applicable to Federal Savings Associations

559.3  What are the characteristics of, and what requirements apply 
to, subordinate organizations of federal savings associations?
559.4  What activities are preapproved for service corporations?
559.5  How much may a savings association invest in service 
corporations or lower-tier entities?

Subpart B--Regulations Applicable to All Savings Associations

559.10  How must separate corporate identities be maintained?
559.11  What notices are required to establish or acquire a new 
subsidiary or engage in new activities through an existing 
subsidiary?
559.12  How may a subsidiary of a savings association issue 
securities?
559.13  How may a savings association exercise its salvage power in 
connection with its service corporation or lower-tier entities?

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


Sec. 559.1  What does this part cover?

    (a) OTS is issuing this part 559 pursuant to its general rulemaking 
and supervisory authority under the Home Owners' Loan Act, 12 U.S.C. 
1462 et seq., and its specific authority under section 18(m) of the 
Federal Deposit Insurance Act, 12 U.S.C. 1828(m). Subpart A of this 
part 559 applies to subordinate organizations of federal savings 
associations. Subpart B of this part applies to subordinate 
organizations of all savings associations. OTS may, at any time, limit 
a savings association's investment in any of these entities, or may 
limit or refuse to permit any activities of any of these entities for 
supervisory, legal, or safety and soundness reasons.
    (b) Notices under this part are applications for purposes of 
statutory and regulatory references to ``applications.'' Any conditions 
that OTS imposes in approving any application are enforceable as a 
condition imposed in writing by the OTS in connection with the granting 
of a request by a savings association within the meaning of 12 U.S.C. 
1818(b) or 1818(i).


Sec. 559.2  Definitions.

    For purposes of this part:
    Control has the same meaning as in part 574 of this chapter.
    GAAP-consolidated subsidiary means an entity in which a savings 
association has a direct or indirect ownership interest and whose 
assets are consolidated with those of the savings association for 
purposes of reporting under Generally Accepted Accounting Principles 
(GAAP). Generally, these are entities in which a savings association 
has a majority ownership interest.
    Lower-tier entity includes any company in which an operating 
subsidiary or a service corporation has a direct or indirect ownership 
interest.
    Operating subsidiary means any entity that satisfies all of the 
requirements for an operating subsidiary set forth in Sec. 559.3 of 
this part and that is designated by the parent savings association as 
an operating subsidiary pursuant to Sec. 559.3 of this part. More than 
50% of the voting shares of an operating subsidiary must be owned, 
directly or indirectly, by a federal savings association and no other 
person or entity may exercise effective operating control. An operating 
subsidiary may only engage in activities permissible for a federal 
savings association.
    Ownership interest means any equity interest in a business 
organization, including stock, limited or general partnership 
interests, or shares in a limited liability company.
    Service corporation means any entity that satisfies all of the 
requirements for service corporations in 12 U.S.C. 1464(c)(4)(B) and 
Sec. 559.3 of this part and that is designated by the investing savings 
association as a service corporation pursuant to Sec. 559.3 of this 
part. A service corporation must be organized under the laws of the 
state where the federal savings association's home office is located, 
may only be owned by savings associations with home offices in that 
state, and may engage in the activities identified in Secs. 559.3(e)(2) 
and 559.4 of this part.
    Subordinate organization means any corporation, partnership, 
business trust, association, joint venture, pool, syndicate, or other 
similar business organization in which a savings association has a 
direct or indirect ownership interest, unless that ownership interest 
qualifies as a pass-through investment pursuant to Sec. 560.32 of this 
chapter and is so designated by the investing savings association.
    Subsidiary means any subordinate organization directly or 
indirectly controlled by a savings association.

Subpart A--Regulations Applicable to Federal Savings Associations


Sec. 559.3  What are the characteristics of, and what requirements 
apply to, subordinate organizations of federal savings associations?

    A federal savings association (``you'') that meets the requirements 
of this section, as detailed in the following chart, may establish, or 
obtain an interest in an operating subsidiary or a service corporation. 
For ease of reference, this section cross-references other regulations 
in this chapter affecting operating subsidiaries and service 
corporations. You should refer to those regulations for the details of 
how they apply. The chart also discusses the regulations that may apply 
to lower-tier entities in which you have an indirect ownership interest 
through your operating subsidiary or service corporation. The chart 
follows:

[[Page 66572]]



----------------------------------------------------------------------------------------------------------------
                                              Operating subsidiary                   Service corporation        
----------------------------------------------------------------------------------------------------------------
(a) How may a federal savings         (1) You must file a notice            (2) You must file a notice          
 association (``you'') establish an    satisfying Sec.  559.11. Any          satisfying Sec.  559.11. Depending 
 operating subsidiary or a service     finance subsidiary that existed on    upon your condition and the        
 corporation?                          January 1, 1997 is deemed an          activities in which the service    
                                       operating subsidiary without          corporation will engage, Sec.      
                                       further action on your part.          559.3(e)(2) may require you to file
                                                                             an application.                    
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(b) Who may be an owner?              (1) Anyone may have an ownership      (2) Only savings associations with  
                                       interest in an operating              home offices in the state where you
                                       subsidiary.                           have your home office may have an  
                                                                             ownership interest in any service  
                                                                             corporation in which you invest.   
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(c) What ownership requirements       (1) You must own, directly or         (2) You are not required to have any
 apply?                                indirectly, more than 50% of the      particular percentage ownership    
                                       voting shares of the operating        interest and need not have control 
                                       subsidiary. No one else may           of the service corporation.        
                                       exercise effective operating                                             
                                       control.                                                                 
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(d) What geographic restrictions      (1) An operating subsidiary may be    (2) A service corporation must be   
 apply?                                organized in any geographic           organized in the state where your  
                                       location.                             home office is located.            
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(e) What activities are permissible?  (1) After you have notified OTS in    (2)(i) If you are eligible for      
                                       accordance with Sec.  559.11, an      expedited treatment under Sec.     
                                       operating subsidiary may engage in    516.3(a) of this chapter, and      
                                       any activity that you may conduct     notify OTS as required by Sec.     
                                       directly. You may hold another        559.11, your service corporation   
                                       insured depository institution as     may engage in the preapproved      
                                       an operating subsidiary.              activities listed in Sec.  559.4.  
                                                                             You may request OTS approval for   
                                                                             your service corporation to engage 
                                                                             in any other activity reasonably   
                                                                             related to the activities of       
                                                                             financial institutions by filing an
                                                                             application in accordance with Sec.
                                                                              516.1 of this chapter.            
                                                                                                                
                                                                            (ii) If you are subject to standard 
                                                                             treatment under Sec.  516.3(b) of  
                                                                             this chapter, and notify OTS as    
                                                                             required by Sec.  559.11, your     
                                                                             service corporation may engage in  
                                                                             any activity that you may conduct  
                                                                             directly except taking deposits.   
                                                                             You may request OTS approval for   
                                                                             your service corporation to engage 
                                                                             in any other activity reasonably   
                                                                             related to the activities of       
                                                                             financial institutions, including  
                                                                             the activities set forth in Sec.   
                                                                             559.4(b)-(i), by filing an         
                                                                             application in accordance with Sec.
                                                                              516.1 of this chapter.            
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(f) May the operating subsidiary or   (1)(i) An operating subsidiary may                                        
 service corporation invest in lower-  itself hold an operating                                                 
 tier entities?                        subsidiary. Part 559 applies                                             
                                       equally to a lower-tier operating                                        
                                       subsidiary. In applying the                                              
                                       regulations in this part, the                                            
                                       investing operating subsidiary                                           
                                       should substitute ``investing                                            
                                       operating subsidiary'' wherever the                                      
                                       part uses ``you'' or ``savings                                           
                                       association.''                                                           
                                                                            (2) A service corporation may invest
                                                                                                                

[[Page 66573]]

                                                                                                                
                                      (ii) An operating subsidiary may                                          
                                       also invest in other types of lower-                                     
                                       tier entities. These entities must                                       
                                       comply with all of the requirements                                      
                                       of this part 559 that apply to                                           
                                       service corporations except for                                          
                                       paragraphs (b)(2) and (d)(2) of                                          
                                       this section.                                                            
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(g) How much may a federal savings    (1) There are no limits on the        (2) Section 559.5 limits your       
 association invest?                   amount you may invest in your         aggregate investments in service   
                                       operating subsidiaries, either        corporations and indicates when    
                                       separately or in the aggregate.       your investments (both debt and    
                                                                             equity) in lower-tier entities be  
                                                                             aggregated with your investments in
                                                                             service corporations.              
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(h) Do federal statutes and           (1) Unless otherwise specifically     (2) (i) If the federal statute or   
 regulations that apply to the         provided by statute, regulation, or   regulation specifically refers to  
 savings association apply?            OTS policy, all federal statutes      ``service corporation,'' it applies
                                       and regulations apply to operating    to all service corporations, even  
                                       subsidiaries in the same manner as    if you do not control the service  
                                       they apply to you. You and your       corporation or it is not a GAAP-   
                                       operating subsidiary are generally    consolidated subsidiary.           
                                       consolidated and treated as a unit                                       
                                       for statutory and regulatory                                             
                                       purposes.                                                                
                                                                                                                
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(i) Do the investment limits that     (1) Your assets and those of your     (2) Your service corporation's      
 apply to federal savings              operating subsidiary are aggregated   assets are not subject to the same 
 associations (HOLA section 5(c) and   when calculating investment           investment limitations that apply  
 part 560 of this chapter) apply?      limitations.                          to you. The investment activities  
                                                                             of your service corporation are    
                                                                             governed by paragraph (e)(2) of    
                                                                             this section and Sec.  559.4.      
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(j) How does the capital regulation   (1) Your assets and those of your     (2) The capital treatment of a      
 (part 567 of this chapter) apply?     operating subsidiary are              service corporation depends upon   
                                       consolidated for all capital          whether it is an includable        
                                       purposes.                             subsidiary. That determination is  
                                                                             based upon factors set forth in    
                                                                             part 567 of this chapter, including
                                                                             your percentage ownership of the   
                                                                             service corporation and the        
                                                                             activities in which the service    
                                                                             corporation engages. Both debt and 
                                                                             equity investments in service      
                                                                             corporations that are GAAP-        
                                                                             consolidated subsidiaries are      
                                                                             considered investments in          
                                                                             subsidiaries for purposes of the   
                                                                             capital regulation, regardless of  
                                                                             the authority under which they are 
                                                                             made.                              
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(k) How does the loans-to-one-        (1) The LTOB regulation does not      (2) The LTOB regulation does not    
 borrower (LTOB) regulation (Sec.      apply to loans from you to your       apply to loans from you to your    
 560.93 of this chapter) apply?        operating subsidiary or loans from    service corporation or from your   
                                       your operating subsidiary to you.     service corporation to you.        
                                       Other loans made by your operating    However, Sec.  559.5 imposes       
                                       subsidiary are aggregated with your   restrictions on the amount of loans
                                       loans for LTOB purposes.              you may make to certain service    
                                                                             corporations. Loans made by a      
                                                                             service corporation that you       
                                                                             control to entities other than you 
                                                                             or your subordinate organizations  
                                                                             are aggregated with your loans for 
                                                                             LTOB purposes.                     
                                                                                                                
----------------------------------------------------------------------------------------------------------------

[[Page 66574]]

                                                                                                                
(l) How do the transactions with      (1) Section 563.41 of this chapter    (2) Section 563.41 of this chapter  
 affiliates (TWA) regulations (Secs.   explains how TWA applies.             explains how TWA applies.          
 563.41 and 563.42 of this chapter)    Generally, an operating subsidiary    Generally, a service corporation   
 apply?                                of a savings association is not       that is controlled by a savings    
                                       deemed to be an affiliate unless it   association is not deemed to be an 
                                       is a depository institution or the    affiliate of that savings          
                                       parent holding company or another     association unless it is a         
                                       affiliate has control of the          depository institution or the      
                                       subsidiary outside of the ownership   parent holding company or another  
                                       chain that runs through the thrift.   affiliate has control of the       
                                       Transactions that an operating        service corporation outside of the 
                                       subsidiary engages in with an         ownership chain that runs through  
                                       affiliate of the thrift are           the thrift. Transactions that a    
                                       aggregated with those of the          service corporation that is        
                                       thrift.                               directly or indirectly controlled  
                                                                             by the savings association engages 
                                                                             in with an affiliate of the savings
                                                                             association are aggregated with    
                                                                             those of the savings association.  
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(m) How does the Qualified Thrift     (1) Under 12 U.S.C. 1467a(m)(5), you  (2) Under 12 U.S.C. 1467a(m)(5), you
 Lender (QTL) (12 U.S.C. 1467a(m))     may determine whether to              may determine whether to           
 test apply?                           consolidate the assets of a           consolidate the assets of a        
                                       particular operating subsidiary for   particular service corporation for 
                                       purposes of calculating your          purposes of calculating your       
                                       qualified thrift investments. If      qualified thrift investments. If a 
                                       the operating subsidiary's assets     service corporation's assets are   
                                       are not consolidated with yours for   not consolidated with yours for    
                                       that purpose, your investment in      that purpose, your investment in   
                                       the operating subsidiary will be      the service corporation will be    
                                       considered in calculating your        considered in calculating your     
                                       qualified thrift investments.         qualified thrift investments.      
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(n) Does state law apply?             (1) State law applies to operating    (2) State law applies to service    
                                       subsidiaries only to the extent it    corporations regardless of whether 
                                       applies to you.                       it applies to you, except where    
                                                                             there is a conflict with federal   
                                                                             law.                               
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(o) May OTS conduct examinations?     (1) An operating subsidiary is        (2) Before you invest in a service  
                                       subject to examination by OTS.        corporation, you must obtain its   
                                                                             written agreement to permit and to 
                                                                             pay the cost of such examinations  
                                                                             as OTS deems necessary.            
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(p) What must be done to redesignate  (1) Before redesignating an           (2) Before redesignating a service  
 an operating subsidiary as a          operating subsidiary as a service     corporation as an operating        
 service corporation or a service      corporation, you should consult       subsidiary, you should consult with
 corporation as an operating           with the OTS Regional Director for    the OTS Regional Director for the  
 subsidiary?                           the Region in which your home         Region in which your home office is
                                       office is located. You must           located. You must maintain adequate
                                       maintain adequate internal records,   internal records, available for    
                                       available for examination by OTS,     examination by OTS, demonstrating  
                                       demonstrating that the redesignated   that the redesignated operating    
                                       service corporation meets all of      subsidiary meets all of the        
                                       the applicable requirements of this   applicable requirements of this    
                                       part and that your board of           part and that your board of        
                                       directors has approved the            directors has approved the         
                                       redesignation.                        redesignation.                     
                                                                                                                
----------------------------------------------------------------------------------------------------------------

[[Page 66575]]

                                                                                                                
(q) What are the consequences of      (1) If an operating subsidiary, or    (2) If a service corporation, or any
 failing to comply with the            any lower-tier entity in which the    lower-tier entity in which the     
 requirements of this part?            operating subsidiary invests          service corporation invests        
                                       pursuant to paragraph (f)(1) of       pursuant to paragraph (f)(2) of    
                                       this section fails to meet any of     this section, fails to meet any of 
                                       the requirements of this section,     the requirements of this section,  
                                       you must notify OTS. Unless           you must notify OTS. Unless        
                                       otherwise advised by OTS, if the      otherwise advised by OTS, if the   
                                       company cannot comply within 90       company cannot comply within 90    
                                       days with all of the requirements     days with all of the requirements  
                                       for either an operating subsidiary    for either an operating subsidiary 
                                       or a service corporation under this   or a service corporation under this
                                       section, or any other investment      section, or any other investment   
                                       authorized by 12 U.S.C. 1464(c) or    authorized by 12 U.S.C. 1464(c) or 
                                       part 560 of this chapter, you must    part 560 of this chapter, you must 
                                       promptly dispose of your              promptly dispose of your           
                                       investment.                           investment.                        
----------------------------------------------------------------------------------------------------------------

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 that govern 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 Sec. 516.1 of 
this chapter and receive prior written OTS approval in order 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:
    (a) Any activity that all federal savings associations may conduct 
directly, except taking deposits.
    (b) Business and professional services. The following services are 
preapproved for service corporations only when they are limited to 
financial documents or financial clients or are generally finance-
related:
    (1) Accounting or internal audit;
    (2) Advertising, marketing research and other marketing;
    (3) Clerical;
    (4) Consulting;
    (5) Courier;
    (6) Data processing;
    (7) Data storage facilities operation and related services;
    (8) Office supplies, furniture, and equipment purchasing and 
distribution;
    (9) Personnel benefit program development or administration;
    (10) Printing and selling forms that require Magnetic Ink Character 
Recognition (MICR) encoding;
    (11) Relocation of personnel;
    (12) Research studies and surveys;
    (13) Software development and systems integration; and
    (14) Remote service unit operation, leasing, ownership or 
establishment.
    (c) Credit-related activities.
    (1) Abstracting;
    (2) Acquiring and leasing personal property;
    (3) Appraising;
    (4) Collection agency;
    (5) Credit analysis;
    (6) Check or credit card guaranty and verification;
    (7) Escrow agent or trustee (under deeds of trust, including 
executing and deliverance of conveyances, reconveyances and transfers 
of title); and
    (8) Loan inspection.
    (d) Consumer services.
    (1) Financial advice or consulting;
    (2) Foreign currency exchange;
    (3) Home ownership counseling;
    (4) Income tax return preparation;
    (5) Postal services;
    (6) Stored value instrument sales;
    (7) Welfare benefit distribution;
    (8) Check printing and related services; and
    (9) Remote service unit operation, leasing, ownership, or 
establishment.
    (e) Real estate related services.
    (1) Acquiring real estate for prompt development or subdivision, 
for construction of improvements, for resale or leasing to others for 
such construction, or for use as manufactured home sites, in accordance 
with a prudent program of property development;
    (2) Acquiring improved real estate or manufactured homes to be held 
for rental or resale, for remodeling, renovating, or demolishing and 
rebuilding for sale or rental, or to be used for offices and related 
facilities of a stockholder of the service corporation;
    (3) Maintaining and managing real estate; and
    (4) Real estate brokerage for property owned by a savings 
association that owns capital stock of the service corporation, the 
service corporation, or a lower-tier entity in which the service 
corporation invests.
    (f) Securities brokerage, insurance and related services.
    (1) Execution of transactions in securities or other nondeposit 
investment products on an agency or riskless principal basis solely 
upon the order of and for the account of customers, provided that the 
service corporation complies with the provisions of Sec. 545.74 of this 
chapter;
    (2) Investment advice, provided that the service corporation 
complies with the provisions of Sec. 545.74 of this chapter;
    (3) Insurance brokerage or agency for liability, casualty, 
automobile, life, health, accident or title insurance;
    (4) Liquidity management;
    (5) Issuing notes, bonds, debentures or other obligations or 
securities; and
    (6) Purchase or sale of coins issued by the U.S. Treasury.
    (g) Investments.
    (1) Tax-exempt bonds used to finance residential real property for 
family units;
    (2) Tax-exempt obligations of public housing agencies used to 
finance housing projects with rental assistance subsidies;
    (3) Small business investment companies licensed by the U.S. Small 
Business Administration to invest in small businesses engaged 
exclusively in the activities listed in paragraphs (a) through (i) of 
this section; and
    (4) Investing in savings accounts of an investing thrift.
    (h) Community development and charitable activities:
    (1) Investments in governmentally insured, guaranteed, subsidized 
or otherwise sponsored programs for housing, small farms, or businesses 
that are local in character;
    (2) Investments that meet the community development needs of, and

[[Page 66576]]

primarily benefit, low- and moderate-income communities;
    (3) Investments in low-income housing tax credit projects and 
entities authorized by statute (e.g., community development financial 
institutions) to promote community, inner city, and community 
development purposes; and
    (4) Establishing a corporation that is recognized by the Internal 
Revenue Service as organized for charitable purposes under 26 U.S.C. 
501(c)(3) of the Internal Revenue Code and making a reasonable 
contribution to capitalize it, provided that the corporation engages 
exclusively in activities designed to promote the well-being of 
communities in which the owners of the service corporation operate.
    (i) Activities reasonably incident to those listed in paragraphs 
(a) through (h) of this section if the service corporation engages in 
those activities.


Sec. 559.5  How much may a savings association invest in service 
corporations or lower-tier entities?

    The amount that a federal savings association (``you'') may invest 
in a service corporation or any lower-tier entity depends upon several 
factors. These include your total assets, your capital, the purpose of 
the investment, and your ownership interest in the service corporation 
or entity.
    (a) Under section 5(c)(4)(B) of the HOLA, you may invest up to 3% 
of your assets in the capital stock, obligations, and other securities 
of service corporations. Any investment you make under this paragraph 
that would cause your investment, in the aggregate, to exceed 2% of 
your assets must serve primarily community, inner city, or community 
development purposes. You must designate the investments serving those 
purposes, which include:
    (1) Investments in governmentally insured, guaranteed, subsidized 
or otherwise sponsored programs for housing, small farms, or businesses 
that are local in character;
    (2) Investments for the preservation or revitalization of either 
urban or rural communities;
    (3) Investments designed to meet the community development needs 
of, and primarily benefit, low- and moderate-income communities; or
    (4) Other community, inner city, or community development-related 
investments approved by OTS.
    (b) In addition to the amounts you may invest under paragraph (a) 
of this section, and to the extent that you have authority under other 
provisions of section 5(c) of the HOLA and part 560 of this chapter, 
and available capacity within any applicable investment limits, you may 
make loans to any service corporation and any lower-tier entity, 
subject to the following conditions:
    (1) You and your GAAP-consolidated subsidiaries may, in the 
aggregate, make loans of up to 15% of your capital as defined in 
Sec. 567.5(c) of this chapter to each subordinate organization that 
does not qualify as a GAAP-consolidated subsidiary. All loans made 
under this paragraph (b)(1) may not, in the aggregate, exceed 50% of 
your total capital, as defined in Sec. 567.5(c) of this chapter.
    (2) The Regional Director may limit the amount of loans to a GAAP-
consolidated subsidiary, or may adjust the limits set forth in 
paragraph (b)(1) of this section where safety and soundness 
considerations warrant such action.
    (c) For purposes of this section, the terms ``loans'' and 
``obligations'' include all loans and other debt instruments (except 
accounts payable incurred in the ordinary course of business and paid 
within 60 days) and all guarantees or take-out commitments of such 
loans or debt instruments.

Subpart B--Regulations Applicable to All Savings Associations


Sec. 559.10  How must separate corporate identities be maintained?

    (a) Each savings association and subordinate organization thereof 
must be operated in a manner that demonstrates to the public that each 
maintains a separate corporate existence. Each must operate so that:
    (1) Their respective business transactions, accounts, and records 
are not intermingled;
    (2) Each observes the formalities of their separate corporate 
procedures;
    (3) Each is adequately financed as a separate unit in light of 
normal obligations reasonably foreseeable in a business of its size and 
character;
    (4) Each is held out to the public as a separate enterprise; and
    (5) Unless the parent savings association has guaranteed a loan to 
the subordinate organization, all borrowings by the subordinate 
organization indicate that the parent is not liable.
    (b) OTS regulations that apply both to savings associations and 
subordinate organizations shall not be construed as requiring a savings 
association and its subordinate organizations to operate as a single 
entity.


Sec. 559.11  What notices are required to establish or acquire a new 
subsidiary or engage in new activities through an existing subsidiary?

    When required by section 18(m) of the Federal Deposit Insurance 
Act, a savings association (``you'') must file a notice (``Notice'') in 
accordance with Sec. 516.1(c) of this chapter at least 30 days before 
establishing or acquiring a subsidiary or engaging in new activities in 
a subsidiary. The Notice must contain all of the information the 
Federal Deposit Insurance Corporation (FDIC) requires pursuant to 12 
CFR 303.13. Providing OTS with a copy of the notice you file with the 
FDIC will satisfy this requirement. If OTS notifies you within 30 days 
that the Notice presents supervisory concerns, or raises significant 
issues of law or policy, you must apply for and receive OTS's prior 
written approval in accordance with Sec. 516.1(c) of this chapter 
before establishing or acquiring the subsidiary or engaging in new 
activities in the subsidiary.


Sec. 559.12  How may a subsidiary of a savings association issue 
securities?

    (a) A subsidiary may issue, either directly or through a third 
party intermediary, any securities that its parent savings association 
(``you'') may issue. The subsidiary must not state or imply that the 
securities it issues are covered by federal deposit insurance. A 
subsidiary may not issue any security the payment, maturity, or 
redemption of which may be accelerated upon the condition that you are 
insolvent or have been placed into receivership.
    (b) You must file a notice with OTS in accordance with Sec. 559.11 
of this part at least 30 days before your first issuance of any 
securities through an existing subsidiary or in conjunction with 
establishing or acquiring a new subsidiary. If OTS notifies you within 
30 days that the notice presents supervisory concerns or raises 
significant issues of law or policy, you must receive OTS's prior 
written approval before issuing securities through your subsidiary.
    (c) For as long as any securities are outstanding, you must 
maintain all records generated through each securities issuance in the 
ordinary course of business, including a copy of any prospectus, 
offering circular, or similar document concerning such issuance, and 
make such records available for examination by OTS. Such records must 
include, but are not limited to:
    (1) The amount of your assets or liabilities (including any 
guarantees you make with respect to the securities issuance) that have 
been transferred or made available to the subsidiary; the percentage 
that such amount represents of the current book value of your assets on 
an unconsolidated basis; and the current book value of all such assets 
of the subsidiary;

[[Page 66577]]

    (2) The terms of any guarantee(s) issued by you or any third party;
    (3) A description of the securities the subsidiary issued;
    (4) The net proceeds from the issuance of securities (or the pro 
rata portion of the net proceeds from securities issued through a 
jointly owned subsidiary); the gross proceeds of the securities 
issuance; and the market value of assets collateralizing the securities 
issuance (any assets of the subsidiary, including any guarantees of its 
securities issuance you have made);
    (5) The interest or dividend rates and yields, or the range 
thereof, and the frequency of payments on the subsidiary's securities;
    (6) The minimum denomination of the subsidiary's securities; and
    (7) Where the subsidiary marketed or intends to market the 
securities.
    (d) Sales of the subsidiary's securities to retail customers must 
comply with Sec. 545.74 of this chapter.


Sec. 559.13  How may a savings association exercise its salvage power 
in connection with a service corporation or lower-tier entities?

    (a) In accordance with this section, a savings association 
(``you'') may exercise your salvage power to make a contribution or a 
loan (including a guarantee of a loan made by any other person) to your 
service corporation or lower-tier entity (``salvage investment'') that 
exceeds the maximum amount otherwise permitted under law or regulation. 
You must notify OTS at least 30 days before making such a salvage 
investment. This notice must demonstrate that:
    (1) The salvage investment protects your interest in the service 
corporation or lower-tier entity;
    (2) The salvage investment is consistent with safety and soundness; 
and
    (3) You considered alternatives to the salvage investment and 
determined that such alternatives would not adequately satisfy 
paragraphs (a)(1) and (a)(2) of this section.
    (b) If OTS notifies you within 30 days that the Notice presents 
supervisory concerns, or raises significant issues of law or policy, 
you must apply for and receive OTS's prior written approval in 
accordance with Sec. 516.1(c) of this chapter before making a salvage 
investment.
    (c) If your service corporation or lower-tier entity is a GAAP-
consolidated subsidiary, your salvage investment under this section 
will be considered an investment in a subsidiary for purposes of part 
567 of this chapter.

PART 560--LENDING AND INVESTMENT

    5. 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.

    6. Section 560.30 is revised to read as follows:


Sec. 560.30  General lending and investment powers of federal savings 
associations.

    Pursuant to section 5(c) of the Home Owners' Loan Act (HOLA), 12 
U.S.C. 1464(c), a federal savings association may make, invest in, 
purchase, sell, participate in, or otherwise deal in (including 
brokerage or warehousing) all loans and investments allowed under 
section 5(c) of the HOLA including, without limitation, the following 
loans, extensions of credit, and investments, subject to the 
limitations indicated and any such terms, conditions, or limitations as 
may be prescribed from time to time by the OTS by policy directive, 
order, or regulation:

                   Lending and Investment Powers Chart                  
------------------------------------------------------------------------
                                                    Statutory investment
                                                         limitations    
                                                      (Endnotes contain 
          Category             HOLA authorization        applicable     
                                                         regulatory     
                                                        limitations)    
------------------------------------------------------------------------
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          5(c)(2)(D)..........  Up to 35% of total  
 corporate debt securities.                          assets.1, 2        
Community development loans   5(c)(3)(B)..........  5% of total assets, 
 and equity investments.                             provided equity    
                                                     investments do not 
                                                     exceed 2% of total 
                                                     assets.3           
Construction loans without    5(c)(3)(D)..........  In the aggregate,   
 security.                                           the greater of     
                                                     total capital or 5%
                                                     of total assets.   
Consumer loans..............  5(c)(2)(D)..........  Up to 35% of total  
                                                     assets.1, 4.       
Credit card loans or loans    (5)(c)(1)(T)........  None.5.             
 made through credit card                                               
 accounts.                                                              
Deposits in insured           5(c)(1)(G)..........  None.5              
 depository institutions.                                               
Education loans.............  5(c)(1)(U)..........  None.5              
Federal government and        5(c)(1)(C),           None.5              
 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 financed.6
                               5(c)(2)(B),                              
                               5(c)(2)(D).                              
Foreign assistance            5(c)(4)(C)..........  1% of total assets.7
 investments.                                                           
General leasing.............  5(c)(2)(C)..........  10% of assets.6     
Home improvement loans......  5(c)(1)(J)..........  None.5              
Home (residential) loans 8..  5(c)(1)(B)..........  None.5, 9           
HUD-insured or guaranteed     5(c)(1)(O)..........  None.5              
 investments.                                                           
Insured loans...............  5(c)(1)(I),           None.5              
                               5(c)(1)(K).                              
Liquidity investments.......  5(c)(1)(M)..........  None.5, 10          
Loans secured by deposit      5(c)(1)(A)..........  None.5, 11          
 accounts.                                                              
Loans to financial            5(c)(1)(L)..........  None.5, 12          
 institutions, brokers, and                                             
 dealers.                                                               
Manufactured home loans.....  5(c)(1)(J)..........  None.5, 13          
Mortgage-backed securities..  5(c)(1)(R)..........  None.5              
National Housing Partnership  5(c)(1)(N)..........  None.5              
 Corporation and related                                                
 partnerships and joint                                                 
 ventures.                                                              
Nonconforming loans.........  5(c)(3)(C)..........  5% of total assets. 

[[Page 66578]]

                                                                        
Nonresidential real property  5(c)(2)(B)..........  400% of total       
 loans.                                              capital.14         
Open-end management           5(c)(1)(Q)..........  None.5              
 investment 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     5(c)(4)(D)..........  1% of total assets. 
 companies \17\.                                                        
Small-business-related        5(c)(1)(S)..........  None.5              
 securities.                                                            
State and local government    5(c)(1)(H)..........  None.5, 18          
 obligations.                                                           
State housing corporations..  5(c)(1)(P)..........  None.5, 19          
Transaction account loans,    5(c)(1)(A)..........  None.5, 20          
 including overdrafts.                                                  
------------------------------------------------------------------------
Notes:                                                                  
1 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.                           
2 A Federal savings association may invest in commercial paper and      
  corporate debt securities, which includes corporate debt securities   
  convertible into stock, subject to the provisions of Sec.  560.40.    
  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.                                                                 
3 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)(B), as explained in an opinion  
  of the OTS Chief Counsel dated May 10, 1995 (available upon request at
  the address set forth in Sec.  516.1(a) of this chapter).             
4 Amounts in excess of 30% of assets, in aggregate, may be invested only
  in loans made by the association directly to the original obligor and 
  for which no finder's or referral fees have been paid. A Federal      
  savings association may include loans to dealers in consumer goods to 
  finance inventory and floor planning in the total investment made     
  under this section.                                                   
5 While there is no statutory limit on certain categories of loans and  
  investments, including credit card loans, home improvement loans,     
  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.                                                    
6 A Federal savings association may engage in leasing activities subject
  to the provisions of Sec.  560.41.                                    
7 This 1% of assets limitation applies to the aggregate outstanding     
  investments made under the Foreign Assistance Act and in the capital  
  of the Inter-American Savings and Loan Bank. Such investments may be  
  made subject to the provisions of Sec.  560.43.                       
8 A home (or residential) loan includes loans secured by one-to-four    
  family dwellings, multi-family residential property and loans secured 
  by a unit or units of a condominium or housing cooperative.           
9 A Federal savings association may make home loans subject to the      
  provisions of Secs.  560.33, 560.34 and 560.35.                       
10 The assets qualifying as liquidity investments are described in Sec. 
  566.1(g) of this chapter. The maturity limitations (except those for  
  bankers acceptances) of Sec.  566.1(g) of this chapter do not apply   
  for purposes of this section.                                         
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.                 
16 A Federal savings association may invest in service corporations     
  subject to the provisions of part 559 of this chapter.                
17 A Federal savings association may only invest in small business      
  investment companies formed pursuant to section 301(d) of the Small   
  Business Investment Act of 1958.                                      
18 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.                      
19 A Federal savings association may invest in state housing            
  corporations subject to the provisions of Sec.  560.121.              
20 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.                                      

    7. Sections 560.32, 560.36, and 560.37 are added to read as 
follows:


Sec. 560.32  Pass-through investments.

    (a) A federal savings association (``you'') may make pass-through 
investments. A pass-through investment occurs when you invest in an 
entity (``company'') that engages only in activities that you may 
conduct directly and the investment meets the requirements of this 
section. If an investment is authorized under both this section and 
some other provision of law, you may designate under which authority or 
authorities the investment is made. When making a pass-through 
investment, you must comply with all the statutes and regulations that 
would apply if you were engaging in the activity directly. For example, 
your proportionate share of the company's assets will be aggregated 
with the assets you hold directly in calculating investment limits 
(e.g., no more than 400% of total capital may be invested in 
nonresidential real property loans).
    (b) You may make a pass-through investment without prior notice to 
OTS if all of the following conditions are met:
    (1) You do not invest more than 15% of your total capital in one 
company;
    (2) The book value of your aggregate pass-through investments does 
not

[[Page 66579]]

exceed 50% of your total capital after making the investment;
    (3) Your investment would not give you direct or indirect control 
of the company;
    (4) Your liability is limited to the amount of your investment; and
    (5) The company falls into one of the following categories:
    (i) A limited partnership;
    (ii) An open-end mutual fund;
    (iii) A closed-end investment trust;
    (iv) A limited liability company; or
    (v) An entity in which you are investing primarily to use the 
company's services (e.g., data processing).
    (c) If you want to make other pass-through investments, you must 
provide OTS with 30 days' advance notice. If within that 30-day period 
OTS notifies you that an investment presents supervisory, legal, or 
safety and soundness concerns, you must file an application with OTS in 
accordance with Sec. 516.1 of this chapter and may not make the 
investment without first receiving OTS's prior written approval. 
Notices under this section are deemed to be applications for purposes 
of statutory and regulatory references to ``applications.'' Any 
conditions that OTS imposes on any pass-through investment shall be 
enforceable as a condition imposed in writing by the OTS in connection 
with the granting of a request by a savings association within the 
meaning of 12 U.S.C. 1818(b) or 1818(i).


Sec. 560.36  De minimis investments.

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


Sec. 560.37  Real estate for office and related facilities.

    A federal savings association may invest in real estate (improved 
or unimproved) to be used for office and related facilities of the 
association, or for such office and related facilities and for rental 
or sale, if such investment is made and maintained under a prudent 
program of property acquisition to meet the federal savings 
association's present needs or its reasonable future needs for office 
and related facilities. A federal savings association may not make an 
investment that would cause the outstanding book value of all such 
investments (including investments under Sec. 559.4(e)(2) of this 
chapter) to exceed its total capital.
    8. Section 560.93 is amended by revising paragraph (a) to read as 
follows:


Sec. 560.93  Lending limitations.

    (a) Scope. This section applies to all loans and extensions of 
credit to third parties made by a savings association and its 
subsidiaries. This section does not apply to loans made by a savings 
association or a GAAP-consolidated subsidiary to subordinate 
organizations or affiliates of the savings association. The terms 
subsidiary, GAAP-consolidated subsidiary, and subordinate organization 
have the same meanings as specified in Sec. 559.2 of this chapter. The 
term affiliate has the same meaning as specified in Sec. 563.41 of this 
chapter.
* * * * *

PART 563--OPERATIONS

    9. The authority citation for part 563 continues to read as 
follows:
    Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 
1817, 1828, 3806; 42 U.S.C. 4106.


Secs. 563.37, 563.38, 563.132  [Removed]

    10. Sections 563.37, 563.38, and 563.132 are removed.
    11. Section 563.41 is amended by revising paragraph (b)(4) to read 
as follows:


Sec. 563.41  Loans and other transactions with affiliates and 
subsidiaries.

* * * * *
    (b) * * *
    (4) The term subsidiary, when used in connection with a savings 
association means a company that is controlled by that savings 
association within the meaning of part 574 of this chapter;
* * * * *

PART 567--CAPITAL

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

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

    13. Section 567.1 is amended by removing in paragraph (l)(1) the 
phrase ``(either directly or through ownership of a subsidiary)'', and 
by revising paragraph (dd) to read as follows:


Sec. 567.1  Definitions.

* * * * *
    (dd) Subsidiary. The term subsidiary means any corporation, 
partnership, business trust, joint venture, association or similar 
organization in which a savings association directly or indirectly 
holds an ownership interest and the assets of which are consolidated 
with those of the savings association for purposes of reporting under 
Generally Accepted Accounting Principles (GAAP). Generally, these are 
majority-owned subsidiaries.1 This definition does not include 
ownership interests that were taken in satisfaction of debts previously 
contracted, provided that the reporting association has not held the 
interest for more than five years or a longer period approved by the 
OTS.
---------------------------------------------------------------------------

    \1\  The OTS reserves the right to review a savings 
association's investment in a subsidiary on a case-by-case basis. If 
the OTS determines that such investment is more appropriately 
treated as an equity security or an ownership interest in a 
subsidiary, it will make such determination regardless of the 
percentage of ownership held by the savings association.
---------------------------------------------------------------------------

* * * * *

PART 571--STATEMENTS OF POLICY

    14. The authority citation for part 571 continues to read as 
follows:

    Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.


Sec. 571.21  [Removed]

    15. Section 571.21 is removed.

    Dated: December 6, 1996.

    By the Office of Thrift Supervision.
Nicolas P. Retsinas,
Director.
[FR Doc. 96-31639 Filed 12-17-96; 8:45 am]
BILLING CODE 6720-01-P