AL 97-2
Subject:  Community Development Securities

TO:  Chief Executive Officers of all National Banks, Community
     Development Finance Organizations, OCC Department and
     Division Heads, and All Examining Personnel

PURPOSE

In response to questions received from national banks, this
advisory letter informs national banks of the standards that
Community Development (CD) Securities must meet to qualify for
purchase under the authority granted by the Investment Securities
regulation, 12 CFR 1.  It also explains the treatment of those
investments under the Community Reinvestment Act regulation, 12
CFR 25. 

DEFINITION

CD Securities are securities that are backed by interests in
pools of community development loans, such as loans to borrowers
in low- and moderate-income areas, or to small businesses.  These
securities typically are not rated by a nationally recognized
statistical rating agency.

DISCUSSION

Twelve USC 24(Seventh), and its implementing regulation, 12 CFR
1, authorize  national banks to purchase, sell, deal in,
underwrite, and hold certain types of securities.  Under the
standards in part 1, a national bank may purchase and hold
unrated CD Securities if the bank concludes, based on reliable
estimates, "that the obligor will be able to satisfy its
obligations under that security, and the bank believes that the
security may be sold with reasonable promptness at a price that
corresponds reasonably to its fair value."  See 12 CFR 1.3(i). 
Acquisitions of CD Securities also must be consistent with safe
and sound banking practices.  Although CD Securities typically do
not receive a rating from a nationally recognized statistical
rating agency, part 1 permits national banks to invest in those
securities if the bank documents that the issuer of the security
will perform.  See OCC Interpretive Letter No. 703.  Performance
documentation may be based on the bank's assessment of the
project underlying the security, credit underwriting standards,
or credit enhancements offered by the organization offering the
securities to support the security and the quality of the
underlying loan pools.  Enhancements such as mortgage insurance,
over collateralization of small business loans, the issuing
organization's commitment to repurchase delinquent loans, and
other enhancements also may demonstrate the obligor's ability to
perform.

Under part 1, national banks may purchase securities acquired on
the basis of reliable estimates including, but not limited to, CD
Securities, in an aggregate amount no greater than 5 percent of
their capital and surplus.  

National banks may also purchase CD Securities as investments
under the CDC, CD Project, and other Public Welfare Investments
regulation, 12 CFR 24, if the CD Securities meet the public
welfare requirements of part 24.  See 12 CFR 24.3(a).  

CRA CONSIDERATIONS

Under the CRA regulation, a national bank can receive positive
consideration for making a "qualified investment" that benefits
its assessment area(s) or a broader statewide or regional area
that includes its assessment area(s).  See 12 CFR 25.12(s).  A
bank's investment in CD Securities would be considered a
qualified investment  under the CRA regulation, provided the
investment benefits the bank's assessment area(s) or a broader
statewide or regional area that includes its assessment area(s). 
This is true even if the loans backing the security are not
located within the bank's assessment area(s).

CONTACTS

If you have any questions about this advisory, please feel free
to contact the Community Development Division at (202) 874-4930;
the Community and Consumer Law Division at (202) 874-5750; or the
Securities and Corporate Practice Division at (202) 874-5210.




                                
Bert A. Otto
Assistant Deputy Comptroller
  for Compliance Management
Date:     February 25, 1997