[Federal Register Volume 66, Number 212 (Thursday, November 1, 2001)]
[Proposed Rules]
[Pages 55131-55138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27329]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 559 and 560

[No. 2001-67]
RIN 1550-AB37


Lending and Investment

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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

DATES: Comments must be received on or before December 3, 2001.

ADDRESSES:
    Mail: Send comments to Regulation Comments, Chief Counsel's Office, 
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention Docket No. 2001-67.
    Delivery: Hand deliver comments to the Guard's Desk, East Lobby 
Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, 
Attention Regulation Comments, Chief Counsel's Office, Docket No. 2001-
67.
    Facsimiles: Send facsimile transmissions to FAX Number (202) 906-
6518, Attention Docket No. 2001-67.
    E-Mail: Send e-mails to [email protected], Attention 
Docket No. 2001-67, and include your name and telephone number.
    Public Inspection: Comments and the related index will also be 
posted on the OTS Internet Site at www.ots.treas.gov. In addition, 
interested persons may inspect comments at the Public Reference Room, 
1700 G Street, NW., by appointment. To make an appointment for access, 
call (202) 906-5922, send an e-mail to public.info@ots.treas.gov">public.info@ots.treas.gov, or 
send a facsimile transmission to (202) 906-7755. (Prior notice 
identifying the materials you will be requesting will assist us in 
serving you.) Appointments will be scheduled on business days between 
10 a.m. and 4 p.m. In most cases, appointments will be available the 
next business day following the date a request is received.

[[Page 55132]]


FOR FURTHER INFORMATION CONTACT: William J. Magrini, Senior Project 
Manager, Supervision Policy, (202) 906-5744; Paul Robin, Assistant 
Chief Counsel, Regulations and Legislation Division, (202) 906-6648, 
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background of the Proposal

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

II. Section-by-Section Analysis

Section 559.4  What Activities Are Preapproved for Service 
Corporations?

    Section 559.4 lists activities that are preapproved for service 
corporations of Federal savings associations. Preapproved means that 
well-managed savings associations planning to initiate the activity in 
a service corporation must only give OTS and the Federal Deposit 
Insurance Corporation (``FDIC'') advance notice under section 18(m) of 
the Federal Deposit Insurance Act and 12 CFR 559.11, rather than 
receive OTS approval.
    Paragraph (g) of Sec. 559.4 currently preapproves service 
corporation investments in only those small business investment 
companies (``SBICs'') licensed by the U.S. Small Business 
Administration (``SBA'') that engage solely in activities otherwise 
permissible for the service corporation itself.\2\ Under the current 
regulation, other investments in SBICs must be approved on a case-by-
case basis.
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    \2\ 12 CFR 559.4(g)(3).
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    The proposed rule would amend this provision to reflect recent 
statutory changes made in the Consolidated Appropriations Act--FY 2001 
(``CAA'').\3\ The CAA gives Federal savings associations the same 
authority that national and state banks enjoy to invest in SBICs \4\ 
and new markets venture capital companies (``NMVCCs'') \5\ licensed by 
the SBA, without restriction as to the activities of those companies. 
Accordingly, proposed Sec. 559.4(g) would preapprove Federal savings 
association service corporation investments in SBICs and NMVCCs without 
regard to the nature of a particular company's activities. (OTS is also 
proposing to amend 12 CFR 560.30 to reflect Federal savings 
associations' ability to make these investments at the thrift level.)
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    \3\ Pub. L. No. 106-554 (Dec. 21, 2000).
    \4\ See section 302(b)(2) of the Small Business Investment Act 
of 1958, as amended by the CAA, 15 U.S.C. 682(b).
    \5\ See new section 5(c)(4)(F) to the HOLA, as amended by the 
CAA, 12 U.S.C. 1464(c)(4)(F), which authorizes federal savings 
associations to invest in securities of any new markets venture 
capital company, subject to a 5% of capital and surplus limit.
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    Paragraph (h) of existing Sec. 559.4 preapproves service 
corporation investments in certain community development and charitable 
activities. Thrifts interested in participating in community 
development projects with other depository institutions have asked how 
the scope of this authority compares to that of banks. OTS is proposing 
to clarify any ambiguity by modifying paragraph (h)(2) to parallel 12 
U.S.C. 24 (Eleventh), which defines a national bank's authority to make 
public welfare investments. That definition includes investments 
``designed primarily to promote the public welfare, including the 
welfare of low- and moderate-income communities or families (such as by 
providing housing, services, or jobs).'' This modification would 
clarify that Federal savings association service corporations have the 
same authority that national banks and state member banks have to make 
investments to promote the public welfare (see 12 U.S.C. 24 (Eleventh) 
and 12 U.S.C. 338a, respectively).
    OTS is also proposing to add a new paragraph (i) to existing 
Sec. 559.4 to preapprove service corporation activities conducted on an 
``as agent'' basis. Section 559.4's preapproved list currently includes 
various activities that are conducted on an agency basis, such as 
insurance agency or acting as a trustee. Allowing service corporations 
to engage on behalf of their customers in ``any activities conducted 
other than as principal'' expands thrifts' opportunities to enter other 
profitable businesses. These activities can enhance their ability to 
meet their customers' needs while presenting no significant risk to 
savings associations or the deposit insurance fund, assuming compliance 
with the applicable capital standards. The capital provisions of HOLA 
recognize that such activities present no higher risks to savings 
associations by specifically excluding activities conducted as agent 
from otherwise applicable higher capital requirements. See 12 U.S.C. 
1464(t)(5)(B). Similarly, the FDIC regulations governing activities by 
state-chartered banks that are not permitted for national banks 
specifically exclude activities conducted other than as principal. See 
12 CFR 362.1(b)(1).

Section 560.3  Definitions.

    HOLA section 5(c) lists various categories of loans and investments 
permissible for Federal savings associations. Because some categories 
focus on the purpose of a loan and others on the security for a loan, 
some loans have characteristics that would qualify them for more than 
one category. For example, a home equity loan could qualify as a loan 
secured by residential real estate, a loan to repair or improve 
residential real property, or a consumer loan. Some loans may be 
collateralized by both real and personal property. OTS

[[Page 55133]]

regulations have long allowed savings associations to report all or 
part of any such multi-category-qualifying loan in whatever category 
best suits the institution's needs. See 12 CFR 560.31(a).
    OTS has received some questions about how the regulatory definition 
of loans secured by real estate at Sec. 560.3 fits into this regulatory 
scheme. In part, the rule currently requires that the savings 
association must ``substantially'' rely on the real estate as ``the 
primary security'' for the loan. We have been asked for clarification 
of the meaning, purpose, and relative importance of ``substantially'' 
and ``primary.'' In trying to understand the regulation's requirements, 
some have focused on the details of how the loan is underwritten and 
others look at how the loan is reported on the Thrift Financial Report.
    Upon review of the statute, which does not contain either term, and 
the confusion that has resulted by having both terms, OTS is modifying 
its definition of real estate loans for purposes of 12 CFR part 560 to 
remove the requirement that the real estate be the primary security for 
a loan. The regulation will expand upon the existing ``substantially 
relies'' requirement by stating that a real estate loan is one where 
the association ``substantially relies upon a security interest in real 
estate given by the borrower as a condition of making the loan.'' The 
purpose of this new language is to treat as a real estate loan only a 
loan that would not have been made in the same amount or on the same 
terms unless it was secured, in whole or in part, by real estate. This 
change is consistent with the definition of ``Loans Secured by Real 
Estate'' in the FFIEC's Call Report Instructions. Thus, for example, a 
$500,000 loan to a non-profit organization or small business where the 
savings association required the organizers or owners to give the 
savings association a security interest valued at $300,000 in the real 
property used by the organization or in the owner's home as a condition 
of making the loan could be treated as either a small business loan or 
as a real estate loan. In contrast, a multi-million dollar loan to a 
large business secured in part by a $100,000 mortgage would not meet 
the requirement that the association ``substantially'' rely on the real 
estate as security for the loan. This change should help savings 
associations use more effectively the long-standing flexibility 
embodied in Sec. 560.31(a).
    OTS is also proposing to modify the definition of ``small business 
loans and loans to small businesses.'' Sections 5(c)(2)(A) and 
10(m)(4)(E) specifically authorize the Director to define the terms 
``small business loans'' and ``small business'' for purposes of HOLA 
investment limits and the Qualified Thrift Lender test, respectively.
    Current OTS regulations, adopted in 1996 when this statutory 
authority was granted, provide two alternatives for determining whether 
a particular loan qualifies as a small business loan for purposes of 
either provision. First, a loan of any size to a business that meets 
the size standards established by the Small Business Administration 
qualifies as a small business loan. Because determining whether a 
particular business meets the SBA size standards can be time-consuming 
and difficult, OTS regulations have also allowed savings associations 
to count any loan of less than $1 million to a business or $500,000 to 
a farm as a small business loan.
    Since 1996, OTS has heard from savings associations that this 
alternative has not provided the flexibility the agency originally 
anticipated, especially in certain higher priced geographic areas. The 
agency therefore proposes to raise the safe harbor level for small 
business loans to $2 million for both businesses and farms. This level 
should help more savings associations use their small business lending 
authority under the HOLA. This increase is also consistent with 
statutory changes made in the CAA to increase the maximum gross loan 
amount for loans qualifying for SBA guarantees under the Sec. 7(a) 
General Business Loan Guaranty program to $2 million. OTS specifically 
requests comment on whether a higher safe harbor level would be 
appropriate.

Section 560.30  General Lending and Investment Powers of Federal 
Savings Associations

    Section 560.30 contains a chart summarizing the lending and 
investment powers granted to Federal thrifts by the HOLA. OTS proposes 
to update the lending and investment chart to reflect the new statutory 
authority granted to savings associations by the CAA to invest in SBICs 
and NMVCCs. As discussed above, the CAA gives Federal savings 
associations the same authority that national and state banks enjoy to 
invest up to 5% of their capital in SBICs and NMVCCs. OTS proposes to 
add NMVCCs as one of the investment categories on the chart with its 
corresponding 5% of total capital investment limit, change the 
investment limit for SBICs in the chart to 5% of total capital, and 
remove endnote 17 because its limits on savings associations' SBIC 
investments have been overridden by the CAA.
    OTS also proposes to update the lending and investment chart to 
reflect section 1201 of the Financial Regulatory Relief and Economic 
Efficiency Act of 2000's \6\ elimination of statutory liquidity 
requirements previously implemented at 12 CFR part 566. OTS has removed 
part 566 in a separate rulemaking and today proposes to remove endnote 
10 of the lending and investment chart, which currently references 
Sec. 566.1(g) regarding assets qualified as liquidity investments.\7\ 
The chart will continue to contain the statutory reference to liquid 
assets as permissible investments.
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    \6\ Pub. L. No. 106-569, 114 Stat. 3032 (2000).
    \7\ Savings associations must maintain sufficient liquidity to 
ensure safe and sound operation. See Sec. 563.161.
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Section 560.36  De Minimis Investments

    Section 560.36 currently permits a Federal savings association to 
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 
types permitted for a national bank under 12 CFR part 24. OTS proposes 
to increase Federal savings associations' authority to make de minimis 
community development investments.
    The regulation enables Federal savings associations to invest in 
community development funds, community centers, and economic 
development initiatives within their communities. These investments 
generally do not present safety and soundness problems and enable a 
thrift to support and participate fully in its community.
    Savings associations, however, have told OTS that they have not 
been able to participate as fully as competing banks of a comparable 
size in local partnerships because of the regulatory limitation for de 
minimis investments. Under the current regulation, for example, a $500 
million savings association with capital of $50 million may invest up 
to $125,000 in the aggregate. A $100 million thrift with capital of $10 
million may invest up to $100,000. National banks of comparable size 
could potentially invest up to $5 million or $1 million respectively.
    To give savings associations, particularly smaller savings 
associations, greater flexibility to support their communities through 
investment, OTS is proposing to amend Sec. 560.36 to increase the de 
minimis limits to the greater of 1% of an association's total capital 
or $250,000. The $500 million association in the

[[Page 55134]]

above example could therefore make up to $500,000 in community 
development investments in the aggregate at the association or 
operating subsidiary level. Additional investments could be made at the 
service corporation level.

Section 560.40  Commercial Paper and Corporate Debt Securities.

    Section 560.40 reiterates HOLA's grant of statutory authority to 
Federal thrifts to invest in commercial paper and corporate debt 
securities and sets out limitations on that authority.\8\ Recently, 
some Federal savings associations have purchased complex investment 
securities with nonstandard ratings, ratings that only apply to the 
principal amount rather than both the principal and interest, or 
payment features such as residuals. These investments tend to be 
speculative in nature, and their likelihood of producing a particular 
rate of return is difficult to assess even where they may be partially 
guaranteed or rated investment grade. These investments are clearly not 
intended to hedge interest rate risk or credit risk. Rather, their 
potential purchase creates risks that highlight the need for savings 
associations to perform thorough underwriting analyses. To address 
issues raised by these types of investments, OTS proposes two changes 
to Sec. 560.40 to codify the agency's existing expectations about the 
circumstances under which these investments may be made.
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    \8\ 12 U.S.C. 1464(c)(2)(D).
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    First, OTS proposes to amend paragraph (a)(2)(ii) to clarify that 
the rating must cover the entirety of the proposed security in which 
the thrift is considering an investment. For example, if only the 
principal of the security is rated as investment grade, the thrift 
could purchase a principal-only interest in that security, but not an 
interest in the security as a whole. OTS also proposes to add a new 
paragraph (c) to Sec. 560.40 that codifies OTS's existing expectations 
that Federal savings associations must conduct an appropriately 
thorough underwriting analysis of any investment security they intend 
to purchase. Proposed paragraph (c) would require that before 
committing to acquire any investment security, a Federal savings 
association must determine whether the investment is safe and sound and 
suitable for the association. The Federal savings association must 
consider, as appropriate, the interest rate, credit, liquidity, price, 
transaction, and other risks associated with the investment activity. 
The savings association must determine that the issuer has adequate 
resources and the willingness to provide for all required payments on 
its obligations in a timely manner. The savings association may 
consider the rating given by a ratings agency in determining the level 
of additional review the association should perform. The savings 
association must also determine that the investment is appropriate for 
the association.\9\
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    \9\ OTS issued a Memorandum for Chief Executives 130, dated 
October 23, 2000, that addresses underwriting the purchase of 
investment securities in more detail. Thrift Bulletin 13a also 
provides guidance on the fundamental underwriting standards thrifts 
should use in this area.
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    In addition to the initial underwriting of the investment, the 
savings association continues to have an ongoing responsibility to 
monitor the investment, including cash flows, collateral quality, and 
the performance of the underlying assets of the security, at least 
quarterly, to determine the effect of any changes to the association's 
investment. As always, the association must be able to demonstrate to 
examiners that it has underwritten its investments appropriately.\10\
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    \10\ The Office of the Comptroller of the Currency has a similar 
regulation addressing safe and sound banking practices with respect 
to securities investments. See 12 CFR 1.5 (2001).
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Section 560.42  State and Local Government Obligations

    Section 560.42 reiterates the HOLA's grant of statutory authority 
to Federal savings associations to invest in obligations issued by any 
state, territory, or political subdivision thereof \11\ and sets out 
regulatory restrictions on that investment authority. OTS is proposing 
to enhance Federal savings associations' ability to invest in state and 
local government obligations by modifying certain of Sec. 560.42's 
regulatory restrictions.
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    \11\ 12 U.S.C. 1464(c)(1)(H).
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    Section 560.42 currently provides that a Federal savings 
association may not invest more than ten percent of its total capital 
in non-general obligations of any one issuer, and that those 
obligations must hold one of the four highest investment grade ratings 
or must be issued by a public housing agency and backed by the full 
faith and credit of the United States. Section 560.42 also authorizes a 
Federal savings association to invest, in the aggregate, up to one 
percent of its assets in the obligations of a state, territory, or 
political subdivision in which the association's home office or a 
branch office is located or in any obligations approved by OTS.
    Proposed Sec. 560.42 eases the current percentage restrictions on 
Federal associations' investment in state and local government 
obligations to give savings associations greater flexibility to make 
those investments on a competitive basis with other financial 
institutions. While the 10 percent of capital per issuer limitation in 
current Sec. 560.42 is a statutory requirement, the other limits are 
considerably stricter than required either by HOLA or the other banking 
regulators.\12\
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    \12\ Id. The OCC allows national banks to invest in general 
obligations of states and municipalities backed by the full faith 
and credit of the issuer without limit. It limits an institution's 
investment in obligations of any one issuer in corporate bonds and 
municipal revenue bonds (Type III securities) to 10% of capital and 
surplus, but does not impose an aggregate limit. Other than general 
obligation bonds, national banks may not invest in non-rated, non-
investment quality Type III securities, such as revenue bonds. The 
OCC does, however, allow national banks to invest in non-rated Type 
III securities if the bank can demonstrate that the securities are 
investment quality. See 12 CFR part 1 (2001).
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    Section 560.42(c)(1)'s current limitation of one percent of assets 
and accompanying geographic limitations for non-rated securities 
appears to make it overly difficult for smaller associations to make 
investments in support of their local community. Enhancing 
associations' ability to invest in non-rated securities that are of 
investment quality should strengthen associations' investment 
portfolios since non-rated municipal securities often pay higher 
interest rates than investment rated municipal securities.
    OTS, however, remains concerned that removing all aggregate limits 
on investment in non-rated government obligations could potentially 
raise safety and soundness issues. Some state and local obligations are 
unrated because they are small issues and the municipality does not 
want to incur the high costs of having their issues rated by a rating 
agency. For small-dollar issues, obtaining a rating is generally not 
feasible. Other issues, however, are not rated because they are not 
investment grade, and the issuer knows it will likely receive an 
unfavorable rating. For example, revenue bond type securities that are 
supported by commercial development projects and not backed by the full 
faith and credit of municipalities generally present greater risks than 
municipal bonds to savings associations' investment portfolios.
    OTS is proposing to revise Sec. 560.42 to give associations greater 
flexibility to invest in general obligations of a governmental entity 
and to invest in high-quality, non-rated municipal securities, while at 
the same time limiting or prohibiting investments in low-quality 
municipal securities. Under the proposal, Federal savings associations 
may invest in general

[[Page 55135]]

obligations of state or political subdivisions without any limitation. 
See proposed Sec. 560.42(a)(1).
    Pursuant to proposed Sec. 560.42(a)(2), Federal savings 
associations may invest in other obligations of a government entity, 
such as revenue bonds, that hold one of the four highest investment 
grade ratings by a nationally recognized rating agency or that are 
nonrated but of investment quality, subject only to a 10% of total 
capital limit for investments in the obligations of any one issuer. 
Finally, OTS has retained its catch-all provision for obligations of a 
governmental entity that do not otherwise qualify under any other 
category. Proposed Sec. 560.42(a)(4) provides that Federal savings 
associations may invest in obligations of a governmental entity that do 
not otherwise qualify under any other paragraph subject to the approval 
and conditions set by the appropriate Regional Director. The per issuer 
limitation remains the same.

III. Request for Public Comment

    OTS invites comment on all aspects of the proposal as well as 
specific comments on the proposed changes. We encourage commenters to 
suggest modifications to approaches discussed above that could meet 
OTS's overall goals of enhancing savings associations' flexibility in a 
competitive mortgage market, encouraging the safe and sound, efficient 
delivery of low-cost credit to the public, and minimizing undue 
regulatory duplication and burden. Because OTS hopes to expeditiously 
publish a final rule effective by beginning of the next calendar 
quarter, OTS is publishing this proposal with a 30-day comment period.

IV. Solicitation of Comments Regarding the Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \13\ requires Federal 
banking agencies to use ``plain language'' in all proposed and final 
rules published after January 1, 2000. OTS invites comments on how to 
make this proposed rule easier to understand. For example:
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    \13\ 12 U.S.C. 4809.
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    (1) Have we organized the material to suit your needs? If not, how 
could the material be better organized?
    (2) Do we clearly state the requirements in the rule? If not, how 
could the rule be more clearly stated?
    (3) Does the rule contain technical language or jargon that is not 
clear? If so, what language requires clarification?
    (4) Would a different format (grouping and order of sections, use 
of headings, paragraphing) make the rule easier to understand? If so, 
what changes to the format would make the rule easier to understand?
    (5) Would more (but shorter) sections be better? If so, what 
sections should be changed?
    (6) What else could we do to make the rule easier to understand?

V. Executive Order 12866

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

VI. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (``Unfunded Mandates Act''), requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
Federal mandate that may result in expenditure by state, local, and 
tribal governments, or by the private sector, of $100 million or more 
in any one year. If a budgetary impact statement is required, section 
205 of the Unfunded Mandates Act also requires an agency to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule. OTS has determined that the proposed rule will not 
result in expenditures by state, local, or tribal governments or by the 
private sector of $100 million or more. Accordingly, a budgetary impact 
statement is not required under section 202 of the Unfunded Mandates 
Act of 1995.

VII. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies 
to prepare an initial regulatory flexibility analysis (``IRFA'') with a 
proposed rule or certify that the proposed rule would not have a 
significant economic impact on a substantial number of small entities. 
Pursuant to section 605(b) of the RFA, OTS certifies that this proposed 
rule will not have a significant economic impact on a substantial 
number of small entities.
    The proposed rule would make certain changes that should reduce 
burden on all savings associations, including small institutions. The 
proposed rule reduces burden on all savings associations by enhancing 
thrifts' flexibility to offer a greater range of products, to invest in 
activities that support their local communities, and to compete more 
effectively with other financial institutions. The proposed rule would 
allow small savings associations to make a greater amount of community 
development investments. Finally, the proposed rule revises Sec. 560.42 
into plain language, which should make it easier for all savings 
associations to comply with the regulation.
    Based on the above discussion, OTS concludes that this proposed 
rule should not have a significant economic impact on a substantial 
number of small entities.

List of Subjects

12 CFR Part 559

    Reporting and recordkeeping requirements, Savings associations, 
Subsidiaries.

12 CFR Part 560

    Consumer protection, Investments, Manufactured homes, Mortgages, 
Reporting and recordkeeping requirements, Savings associations, 
Securities.
    Accordingly, the Office of Thrift Supervision proposes to amend 12 
CFR chapter V as follows:

PART 559--SUBORDINATE ORGANIZATIONS

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

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


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


Sec. 559.4  What activities are preapproved for service corporations?

    This section sets forth the activities that have been preapproved 
for service corporations. Section 559.3(e)(2) of this part sets forth 
the procedures for engaging in a broader scope of activities on a case-
by-case basis. You should read these two sections together to determine 
whether you must file a notice with OTS under Sec. 559.11 of this part, 
or whether you must file an application under part 516 of this chapter 
and receive prior written OTS approval for your service corporation to 
engage in a particular activity. To the extent permitted by 
Sec. 559.3(e)(2) of this part, a service corporation may engage in the 
following activities:
* * * * *
    (g) * * *
    (3) Small business investment companies and new markets venture 
capital companies licensed by the U.S. Small Business Administration; 
and
* * * * *
    (h) * * *
    (2) Investments designed primarily to promote the public welfare, 
including

[[Page 55136]]

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

PART 560--LENDING AND INVESTMENT

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

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

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


Sec. 560.3  Definitions.

* * * * *
    Real estate loan, for purposes of this part, is a loan for which 
the savings association substantially relies upon a security interest 
in real estate given by the borrower as a condition of making the loan. 
* * *
* * * * *
    Small business loans and loans to small businesses include any loan 
to a small business as defined in this section; or a loan (including a 
group of loans to one borrower) that does not exceed $2 million to a 
business or farm.
    5. Section 560.30 is revised to read as follows:


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

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

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

[[Page 55137]]

 
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 companies.  15 U.S.C. 682(b)(2)       5% of total capital.
Small-business-related securities...  5(c)(1)(S)                None.\6\
State and local government            5(c)(1)(H)                None for general obligations. Per issuer
 obligations.                                                    limitation of 10% of capital for other
                                                                 obligations.6 17
State housing corporations..........  5(c)(1)(P)                None.6 18
Transaction account loans, including  5(c)(1)(A)                None.6 19
 overdrafts.
----------------------------------------------------------------------------------------------------------------

Endnotes

    1. All references are to section 5 of the Home Owners' Loan Act 
(12 U.S.C. 1464) unless otherwise indicated.
    2. For purposes of determining a Federal savings association's 
percentage of assets limitation, investment in commercial paper and 
corporate debt securities must be aggregated with the Federal 
savings association's investment in consumer loans.
    3. A Federal savings association may invest in commercial paper 
and corporate debt securities, which includes corporate debt 
securities convertible into stock, subject to the provisions of 
Sec. 560.40. Amounts in excess of 30% of assets, in the aggregate, 
may be invested only in obligations purchased by the association 
directly from the original obligor and for which no finder's or 
referral fees have been paid.
    4. The 2% of assets limitation is a sublimit for investments 
within the overall 5% of assets limitation on community development 
loans and investments. The qualitative standards for such loans and 
investments are set forth in HOLA section 5(c)(3)(A) (formerly 
5(c)(3)(B), as explained in an opinion of the OTS Chief Counsel 
dated May 10, 1995 (available at www.ots.treas.gov)).
    5. Amounts in excess of 30% of assets, in the aggregate, may be 
invested only in loans made by the association directly to the 
original obligor and for which no finder's or referral fees have 
been paid. A Federal savings association may include loans to 
dealers in consumer goods to finance inventory and floor planning in 
the total investment made under this section.
    6. While there is no statutory limit on certain categories of 
loans and investments, including credit card loans, home improvement 
loans, education loans, and deposit account loans, OTS may establish 
an individual limit on such loans or investments if the 
association's concentration in such loans or investments presents a 
safety and soundness concern.
    7. A Federal savings association may engage in leasing 
activities subject to the provisions of Sec. 560.41.
    8. This 1% of assets limitation applies to the aggregate 
outstanding investments made under the Foreign Assistance Act and in 
the capital of the Inter-American Savings and Loan Bank. Such 
investments may be made subject to the provisions of Sec. 560.43.
    9. A home (or residential) loan includes loans secured by one-
to-four family dwellings, multi-family residential property, and 
loans secured by a unit or units of a condominium or housing 
cooperative.
    10. A Federal savings association may make home loans subject to 
the provisions of Secs. 560.33, 560.34, and 560.35.
    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. 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.
    18. A Federal savings association may invest in state housing 
corporations subject to the provisions of Sec. 560.121.
    19. Payments on accounts in excess of the account balance 
(overdrafts) on commercial deposit or transaction accounts shall be 
considered commercial loans for purposes of determining the 
association's percentage of assets limitation.
    6. Revise 560.36 to read as follows:


Sec. 560.36  De minimis investments.

    A Federal savings association may invest in the aggregate up to the 
greater of 1% of its total capital or $250,000 in community development 
investments of the type permitted for a national bank under 12 CFR part 
24.
    7. Amend Sec. 560.40 by adding the words ``as to the portion of the 
security in which the association is investing'' after ``categories'' 
in Sec. 560.40(a)(2)(ii) and by adding Sec. 560.40(c) to read as 
follows:


Sec. 560.40  Commercial paper and corporate debt securities.

* * * * *
    (c) Underwriting. Before committing to acquire any investment 
security, a Federal savings association must determine whether the 
investment is safe and sound and suitable for the association. The 
Federal savings association must consider, as appropriate, the interest 
rate, credit, liquidity, price, transaction, and other risks associated 
with the investment activity. The Federal savings association must also 
determine that the issuer has adequate resources and the willingness to 
provide for all required payments on its obligations in a timely 
manner.
    8. Revise 560.42 to read as follows:

[[Page 55138]]

Sec. 560.42  State and local government obligations.

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

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

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

    Dated: October 25, 2001.

    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 01-27329 Filed 10-31-01; 8:45 am]
BILLING CODE 6720-01-P