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Formation of a National Bank Subsidiary Community Development Corporation

The following questions and answers provide guidance on national bank investments under 12 CFR 24 and 12 USC 24(Eleventh) authority. These questions and answers generally relate to forming national bank subsidiary community development corporations (CDCs). In general, the references made to CDCs below refer to national bank subsidiary CDCs.

What are national bank subsidiary CDCs and why are they formed? 

A CDC is a corporate entity that specializes in the development and rehabilitation of real estate, investment in business ventures, and related activities designed to address the housing, commercial redevelopment, employment, and community facilities needs of low- and moderate-income persons or areas or other areas targeted by government entities for redevelopment. Typically, bank CDCs are used to undertake a number of projects over a long period of time, usually reinvesting any income in future projects.

Banks that create wholly-owned, subsidiary CDCs typically do so for several reasons. First, a CDC subsidiary can serve as a mechanism to address community development needs on an ongoing basis. Deteriorated or declining neighborhoods and communities almost always have a multiplicity of needs that require a long-term commitment of resources to facilitate revitalization. In that context, a CDC represents an institutional commitment that enables a bank to take action on multiple community development projects over time.

Second, the CDC approach provides the maximum flexibility for making community development investments of all types and responding to community needs or project opportunities as they arise. For example, a subsidiary CDC may be authorized to

  • develop its own projects including the ownership of community development real estate.
  • form or invest in joint ventures and limited partnerships, such as projects that offer low-income housing tax credits, new markets tax credits, historic tax credits, and other federal, state, or local tax credits for community development activity.
  • invest in small businesses.
  • provide gap equity and financing for community development projects developed by others.

Although some bank CDCs specialize only in housing or small business investment, others take a more comprehensive approach to community development. In addition, bank-owned CDCs partner with community-based CDCs to maximize and exchange expertise. Such partnerships can be a valuable and cost effective way to reach the community.

Third, a subsidiary CDC, such as a specialized bank lending unit, can provide an organizational focal point within a bank for community development activities, enabling it to marshal resources and centralize community development expertise. Attracting, training, and supporting staff to develop expertise in community development finance will be especially important. Community development financing in general, and equity investing in particular, are unique activities requiring special expertise in real estate development (including low income housing tax credits and historic tax credits), government-assisted housing, community and economic development programs, and community development finance techniques.

Fourth, a subsidiary CDC enables a bank to leverage its capital for community development purposes while limiting its exposure to risks associated with investing in economically distressed or declining areas. As a corporate entity, a CDC can leverage its capital with loans and reinvest its income without requiring additional financial resources from its parent bank.

Many CDCs also meet the definition of a community development financial institution (CDFI), can be designated as a community development entity(CDE), and may be eligible to receive new markets tax credit allocations. Based on its mission, a CDC can request CDFI Fund certification, and a bank may be eligible for Bank Enterprise Award Program funding as a result of CDC subsidiary activities. [For more information, read about CDFI Fund certification and new markets tax credits.]

What banking regulations pertain to CDC formation? 

OCC permits national bank subsidiary CDCs to be formed under 12 CFR 24. National bank subsidiary CDCs are permitted to engage in activities that primarily promote the public welfare. Permissible activities primarily benefit

  • low- and moderate-income persons;
  • low- and moderate-income areas; or
  • areas targeted for redevelopment by a government entity (12 CFR 24.3).

In addition, investments that would receive "qualified investment" consideration under 12 CFR 25.23 (implementing the Community Reinvestment Act) are also permissible activities.

For example, bank CDCs that support the purchase, rehabilitation, and sale of single-family homes, or the purchase, development, rehabilitation, sale, or rental of multifamily housing, would meet the public welfare standard if the majority of the housing units will be owned or rented by low- and moderate-income families. Also, CDCs that invest in, or otherwise help finance businesses or ventures located in low- and moderate-income areas or other targeted redevelopment areas, or that produce or retain permanent jobs, the majority of which are held by low-and moderate income persons, would meet the public welfare standard. (See 12 CFR 24.6 for other examples of qualifying public welfare activities for CDCs. In general, a CDC may also invest in a small business investment company (SBIC) because SBICs are typically considered "qualified investments" under CRA. [See more information on page 41 of the "Interagency Questions and Answers Regarding Community Reinvestment (DOC)."

What are the benefits of forming a bank-owned CDC? 

Banks structure CDCs in a variety of ways. One important consideration for national banks that are part of a holding company is deciding whether the bank or holding company will own a controlling interest in the CDC. The following list provides some key points for a bank to consider in deciding whether the CDC will be an affiliate (the holding company holds a controlling interest) or a subsidiary (the bank holds a controlling interest).


Affiliate – If the bank funds the CDC through the holding company, the capital contribution from the bank to form the CDC will reduce the bank's capital.

Subsidiary - The capital contributions will not reduce the bank's capital since the assets of the CDC subsidiary will be consolidated with the capital of the bank. If a third party also invests in the CDC, the minority investment will increase the bank's tier 1 capital.

Dividend Capacity

Affiliate - If the bank funds the CDC through the holding company, the funds contributed by the bank will also reduce the bank's future dividend paying capacity.

Subsidiary - The funding of the CDC will not affect the bank's future dividend paying capacity.

CDC's Earnings

Affiliate - If the CDC is profitable, the benefits accrue to the holding company.

Subsidiary - If the CDC is profitable, the benefits accrue to the bank.

Affiliate Transaction Limits (Sections 23A and 23B)

Affiliate - After the CDC is formed, transactions between the bank and the CDC will be subject to limitations imposed by sections 23A and 23B of the Federal Reserve Act. These transactions will count towards an aggregate limit on all such transactions, and thus may reduce the bank's ability to engage in transactions with other affiliates. Compliance with these laws may also increase the cost of funding the CDC.

Subsidiary - Sections 23A and 23B do not apply to transactions with the CDC, and, consequently, the bank's ability to conduct transactions with other affiliates will not be impaired, and the CDC's cost of funds is minimized, which can allow the CDC greater flexibility when making investments.


Affiliate - Two regulatory agencies are involved in supervision of the CDC.

Subsidiary - Only the bank's primary regulator is directly involved in the supervision of the CDC.

What legal documents need to be prepared and/or filed? 

National bank investments in bank-owned CDCs must meet the requirements of 12 CFR 24 (the OCC's public welfare investment regulation, or "Part 24"). Investments in bank-owned CDCs must comply fully with the 12 CFR 24 application (CD-1 form) and certification process. Such investments also require that national bank subsidiary CDCs operate in a manner that does not expose the bank to liability beyond the amount of the bank's investment in the CDC. The most common structure banks have chosen for CDCs are separately chartered subsidiary corporations. In such circumstances, the bank owns the stock of the subsidiary corporation. Owning shares of stock generally gives the bank the right to exercise some control over the corporation's management and to share in its earnings and in any residual proceeds from the liquidation of assets upon the corporation's dissolution. This corporation would be chartered through the secretary of state or Department of Corporations in the CDC's home state. The OCC does not have a standard or "model" CDC charter or articles of incorporation. Most states have a standard corporate charter or articles of incorporation on the secretary of state's or Department of Corporations' website. Some bank CDCs have chosen to make the "purpose" section of the articles of incorporation broad, authorizing the CDC "to engage in public welfare activities consistent with 12 USC 24(Eleventh)." Other banks have chosen to adopt narrower language in the articles of incorporation, enumerating the community development activities in which the CDC intends to engage (often identifying specific activities from the list of public welfare investment activities in 12 CFR 24.6.

National banks forming or investing in CDC subsidiaries typically submit a CD-1 form to the OCC under the guidelines established in 12 CFR 24.5(b). Pursuant to 12 CFR 24.5(a), banks also may be eligible to form or invest in a CDC by providing the OCC with an after-the-fact notice within 10 days after making such investment (see 12 CFR 24.5(a)(2)).

How is a bank protected from unlimited liability? 

A CDC's corporate separateness protects the bank(s) from debts and liabilities of a CDC. A CDC's operations should be reviewed to ensure that it maintains a separate corporate identity. If a CDC subsidiary fails to maintain its separateness, the parent could become liable for the debts and obligations of the subsidiary, subject to litigation, or both. How a bank goes about keeping corporate identities separate is to some extent determined by state law and the general nature of subsidiary operations. Certain organizational elements and operating procedures are generally recognized as preserving corporate separateness in the absence of other factors, such as fraudulent purpose on the part of the parent.

Factors that determine separateness include corporate procedures, financing, business purpose, and disclosure of information. Specific steps to establish and maintain separateness include

  • maintaining a separate office through which the subsidiary's business is conducted.
  • having at least one subsidiary director who is not an employee of the bank.
  • maintaining separate corporate records and books.
  • not commingling funds.
  • holding separate board of directors meetings.
  • maintaining separate minutes and making separate resolutions, to authorize the subsidiary CDC's actions.
  • maintaining adequate capitalization.
  • providing adequate disclosure of the subsidiary's activities in any offering circular, prospectus, or public announcement.

The Comptroller's Handbook Booklet on Related Organizations contains additional information about the various factors considered by the courts when deciding whether to hold a parent entity liable for the debts of its subsidiary.

How should a CDC's mission statement be developed? 

Managing a CDC begins with a mission statement. The institution's selection of investment activities on which to focus is an important first step in meeting the needs of communities – whether urban or rural. Typically, financial institutions have used their business experience and ongoing community development relationships to help them develop their investment strategies. Community outreach helps identify critical needs and projects, potential target areas, and capital gaps that might be addressed.

In some cases, institutions participate in formal community planning activities from which community development needs, priorities, and investment opportunities emerge. But oftentimes, community development corporations are formed when an institution finds that it cannot respond to specific financing requests from businesses, government agencies, or community groups using only conventional loans and banking services.

When developing a mission statement or charter for a subsidiary CDC, institutions should have a clear idea of both their initial objectives and of the types of future investment activities they may want to undertake. For example, although an institution's immediate interest may be to invest in one specific, low-income housing project in a particular neighborhood, it may also be aware of other community development needs that it would want to address in the future. In such cases, the institution might want to structure its proposal based on a range of contemplated investments activities that would meet regulatory standards and conditions. Common examples of CDC activities are provided in 12 CFR 24.6. Banks are encouraged to write their CDC charters broadly enough to ensure flexibility to engage in a range of activities. However, banks that do broaden their activities beyond those identified in their initial charter may amend that charter, provided that the amended charter is consistent with the requirements of 12 CFR 24.

How are profits from a CDC distributed? 

The OCC places no limits on either the amounts or timing of profits that can be generated from a national bank's CDC activity. National banks can receive profit distributions or dividends from a CDC subsidiary. CDCs may also reinvest profits, subject to the dollar and percent-of-capital-and-surplus limitations established in previous CD-1 filings.

Is community involvement/representation required for a CDC established under 12 CFR 24? 

There is no requirement that a national bank have community representation on the board of its CDC, nor is there any obligation for a national bank to involve the broader community—or seek public input—in the formation, establishment and operation of its CDC. The OCC believes, however, that the potential for success is improved when national banks seek and consider the views of the affected neighborhoods or communities before engaging in investment activity.

To ensure that CDCs and project investments are responsive to community needs and help leverage community resources, national banks are encouraged to establish mechanisms for outreach and consultation with affected groups in the community or project area. Depending on the nature and location of a project, these groups might include neighborhood development organizations, community advocacy groups, local government officials and agencies, small businesses, or merchants' associations. Consultation with affected parties helps a bank

  • identify worthwhile projects.
  • establish cooperative working relationships with public agencies, development groups, and potential investors.
  • market completed projects to those most in need.

Some bank CDCs have established a community advisory committee in the community where projects are considered. Others have used community outreach mechanisms already established by their parent institutions. In addition, some bank-owned CDCs partner with community based CDCs for joint venture projects. Such joint ventures can be cost effective and can provide expertise that complements the bank's expertise.

Where can additional information be found? 

The OCC's Community Development Unit maintains information about national bank investments in CDCs and other public welfare investments on its website. A downloadable version of the CD-1 form is available on this site. You may also contact the OCC's Community Affairs Officers, located in each OCC district, to obtain more information about creating a CDC or making other types of 12 CFR 24 public welfare investments.

For additional information about new markets tax credits and CRA, review Interpretive Letter #984 (PDF).

Promoting the public welfare: What bank CDCs can do

Bank CDCs may make a variety of investments that promote the public welfare by primarily benefiting low- and moderate-income persons or areas, or other areas targeted by governmental entities for redevelopment. Investments meeting this standard may include those that provide or support one of the following activities, if they are otherwise permissible:

Affordable housing, community services, or permanent jobs

  • Finance, acquire, develop, rehabilitate, manage, sell or rent affordable housing
  • Develop and operate an assisted living facility for the elderly
  • Develop and operate a special needs project, such as transitional housing for the homeless
  • Develop and operate a medical or mental health facility
  • Develop and operate a community services facility
  • Provide credit counseling and job training
  • Conduct community development research
  • Qualify for federal low-income housing tax credits
  • Qualify for historic rehabilitation tax credits
  • Generate or retain permanent jobs.

Equity or debt financing for small business

  • Provide equity or debt financing and/or technical assistance for small businesses and micro-enterprises
  • Invest in a community development entity that provides financing for small businesses
  • Qualify for federal new markets tax credits

Area revitalization or stabilization

  • Develop and operate a commercial or industrial property
  • Develop and operate a business incubator
  • Form a community development financial institution (CDFI) or community development focus bank
  • Form and operate an agricultural property

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