Calvert Social Investment Foundation/ BRIDGE Housing Corporation Calvert Social Investment Foundation, an intermediary for bank investors wanting to make public welfare investments, invested in this environmentally friendly, cost-effective housing for seniors in California.

Karen Bellesi, Community Development Manager, OCC

National banks interested in making investments under the public welfare investment authority (12 CFR 24) must comply with certain regulatory and public welfare standards and notify the OCC of their investment plans. This article outlines these standards, explains the OCC notification process, and provides links for further information.

The public welfare investment authority requires that a bank’s investment must be designed primarily to promote the public welfare, such as by providing housing, services, or jobs.

Specifically, a national bank or national bank subsidiary may make an investment directly or indirectly if the investment primarily benefits low- and moderate-income individuals, low- and moderate-income areas, or other areas targeted by a governmental entity for redevelopment, or if the investment would receive consideration as a "qualified investment" under 12 CFR 25.23 of the CRA.

The specific public welfare investment standards and investment limits are outlined in 12 CFR 24.3. The regulation is available at the OCC’s Public Welfare Investments (12 CFR 24) Web page.

National banks use the public welfare investment authority to make investments in a variety of activities, such as creating affordable housing and supporting other residential and commercial real estate development, providing equity for small business start-ups and expansions, and revitalizing or stabilizing government-designated development areas.

Examples of activities permitted under the public welfare investment authority include (but are not limited to) those identified in 12 CFR 24.6.

National banks can make public welfare investments directly or indirectly through community and economic development entities (CEDE) that engage in eligible activities. Public welfare investments must be structured so they do not expose the banks to unlimited liability.

Examples are listed in 12 CFR 24.2(c). CEDEs may include (but are not limited to) subsidiary CDCs, multi-investor CDCs, limited partnerships and limited liability companies, CDFIs, and community development loan funds. Banks’ investments should be structured so they do not expose the banks to unlimited liability.

Other Legal Authority Supporting Public Welfare Investments

In certain cases, banks can make public welfare investments without using the public welfare investment authority and by using other legal authority. For example, a bank can purchase:

• Stock in a Small Business Investment Company (SBIC), a private investment supported by the Small Business Administration. This investment provides venture capital funds for small businesses and may be considered a qualified investment under CRA. The Small Business Investment Company Act of 1958 authorizes national banks to make investments in SBICs (15 USC 682(b)).
• Municipal or mortgage revenue bonds or mortgage-backed securities that specifically support affordable housing or other community development consistent with the requirements and limitations of 12 USC 24 (Seventh) and the OCC's implementing regulations of 12 CFR Part 1.

Dodd-Frank Wall Street Reform

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, sometimes referred to as the “Volcker Rule,” contains provisions limiting some types of private equity investments by national banks. These provisions explicitly exempt public welfare investments made by national banks under 12 USC 24 (Eleventh).

The statute provides that an exemption is not available if the public welfare investment would involve or result in a “material conflict of interest” between the bank and its clients, customers, or counterparties; would result, directly or indirectly, in a material exposure to “high-risk assets” or “high-risk trading strategies;” would pose a threat to the bank’s safety or soundness; or would pose a threat to U.S. financial stability.

The OCC, Federal Deposit Insurance Corporation, and Federal Reserve Board will define the key terms in these standards – including "material conflict of interest," "high risk asset," and "high risk trading strategy," – in joint regulations to be issued 15 months after the enactment of Dodd-Frank, that is, in October 2011.

The provisions of the Volcker Rule become effective 12 months after the issuance of the agencies’ implementing rules or two years after the statute’s enactment, whichever is sooner. In the meantime, national banks’ public welfare investment activity remains subject to the OCC’s regulations at 12 CFR 24.

Getting OCC Approval for Public Welfare Investments

A national bank seeking to make a public welfare investment may receive OCC approval in one of two ways: after-the-fact notification or by prior approval.

With either approach, the bank must complete the OCC’s form, CD-1 National Bank Community Development (Part 24) Investments. This is also available on the OCC’s Public Welfare Investments (12 CFR 24) Web page. National banks, with special authorization, may also submit these filings electronically through the OCC’s BankNet Web site.

After-the-fact notification: Banks eligible to provide after-the-fact notifications may make public welfare investments without prior OCC approval but should notify the OCC within 10 days of making the investment. The requirements for after-the-fact notifications are described in 12 CFR 24.5(a).

A national bank is eligible to provide an after-the-fact notification if it meets the criteria outlined in 12 CFR 24.2(e):

• The bank is well capitalized,
• The bank has a composite rating of 1 or 2 under the Uniform Financial Institutions Rating System,
• The bank has a CRA rating of “outstanding” or “satisfactory,” and
• The bank is not subject to a cease-and-desist order, consent order, formal written agreement, or Prompt Corrective Action directive.

If a bank does not meet all of these criteria, it will not be eligible to provide an after-the-fact notification. If the bank is at least adequately capitalized and has a composite rating of at least 3 with improving trends, however, it may send a letter to the OCC requesting authorization to provide an after-the-fact notification. With that special written permission, the bank may provide after-the-fact notifications.

As previously described, a bank’s public welfare investment must meet the tests for qualifying public welfare investments (12 CFR 24.3) and investment limits (12 CFR 24.4). A bank may not provide an after-the-fact notification if any of the following apply:

• The bank’s aggregate public welfare investments and outstanding commitments, including the proposed investment, exceed 5 percent of its capital and surplus. (Note: A bank whose aggregate public welfare investments exceed 5 percent of its capital and surplus may seek prior OCC approval to provide after-the-fact notifications for an amount up to 15 percent of capital and surplus.)
• The investment involves properties carried on the bank’s books as “other real estate owned.”
• The OCC determines in published guidance that the investment is inappropriate for submission through the after-the-fact notice process. This guidance is maintained on OCC’s Web site.

Generally, for purposes of the after-the-fact notification process, a bank’s public welfare investment should be consistent with the examples of qualifying public welfare investments found at 12 CFR 24.6. Further, the investment structure generally should be consistent with the list of examples of the types of CEDEs found at 12 CFR 24.2(c).

Prior Approval: If either the bank or the proposed public welfare investment does not meet the requirements for providing an after-the-fact notification, then the bank must submit a request for prior approval and must receive such approval from the OCC before it can make the specific investment. The process for prior approval and the factors that the OCC considers when evaluating a bank’s proposal are described in 12 CFR 24.5(b). Generally, the OCC provides a written decision to the bank within 30 days of the request. The OCC may extend the review period by notifying the bank.

The OCC may also impose conditions in connection with its approval of an investment under the public welfare investment authority. A bank should maintain information concerning its public welfare investment in a form that is readily accessible and available for OCC examination.

To submit a public welfare investment notification, banks should mail the CD-1 form to:

Community Affairs Department
Office of the Comptroller of the Currency
Washington, DC 20219

The form may also be faxed to (202) 874-4652 or e-mailed.

National banks may also submit their public welfare investment filings electronically through BankNet. For more information about using BankNet for submitting public welfare investment authority applications, see OCC’s Community Developments Fact Sheet “Public Welfare Investment Filings on E-Corp.”

Where Can Banks Get Answers?

The OCC’s Community Affairs Department maintains information about national bank investments in CDCs, community development projects, and other public welfare investments on its Web site. The site provides banks with a host of community development investment resources, including frequently asked questions and answers, letters describing precedent-setting uses of the public welfare investment authority (see Electronic Interpretations and Actions), an alphabetical list of funds that banks have invested in, examples of specific bank investments and other OCC policy materials. Also, read the “At-a-Glance” side bar to find annual lists of investments that were approved under the public welfare investment authority.

In addition, the OCC’s District Community Affairs Officers, located in each OCC District, are available to provide assistance to banks with public welfare investment filings. A listing of Community Affairs Officers is provided here.