FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Part 362: Whether a Community Development Project Is a "Permissible" Investment for a State Bank
October 21, 1994
Cottrell L. Webster, Regional Director
Subject: Community Development Project Partnership
We are in receipt of your letter dated September 29, 1994, in which you have described your preliminary plans to establish a community development project ("Joint CD-Project") for the construction of a new 100,000 square foot building in an industrial park located in a governmental designated redevelopment area. You state that the building would attract new, small businesses and create jobs for low- to moderate-income individuals. You also state that the community development needs addressed by this proposal have not been satisfied by the private market. You have asked us to determine if this is a "permissible" investment for a state bank; and, if not, what additional information would be needed to file an application pursuant to Part 362.
As you know, under section 24 of the Federal Deposit Insurance Act, 12 U.S.C. § 1831a, and Part 362 of the FDIC's Rules and Regulations, 12 C.F.R. Part 362, a state bank may not make any equity investments of a type or in an amount that are not permissible for national banks, with few exceptions. Under section 24 (eleventh) of the National Bank Act, 12 U.S.C. § 24 (11th), a national bank may make investments designed primarily to promote the public welfare. Based on this national bank investment authority, the FDIC's Legal Division has determined that a state bank's investment in a community development corporation/project is a permissible activity for purposes of Part 362, subject to the OCC regulations implementing 12 U.S.C. § 24 (11th) contained in 12 C.F.R. Part 24.
Specifically, the FDIC will permit a state bank to engage in a particular community development project if the particular investment is on the list of previously approved investments maintained by the OCC, or if a particular investment is identical in all material respects to an investment that appears on the OCC's approved list. We have determined that the Joint CD-Project you have proposed is similar to one approved by the OCC in February 1982 and as such would be a permissible equity investment subject to the considerations discussed below.
The OCC regulations identify several types of community development arrangements. The type of arrangement you ultimately decide upon will affect the extent and applicability of the requirements discussed further below. For purposes of this discussion, we have assumed that the limited scope of the proposed Joint CD-Project you have described suggests that you will be engaging in a "community development project", as defined in the OCC's regulations. In relevant part, the definition of "community development project," 12 C.F.R. § 24.2(c), provides the following:
A specific project in a particular location or area, including . . . a governmental-designated redevelopment area . . . whose purpose is to foster economic improvement of that area, and other community development initiatives considered permitted public welfare investments under § 24.4(a). A CD-project investment funds the development or renovation of one or more specified residential or commercial properties in a manner consistent with community and government revitalization plans. (emphasis added)
The Joint CD-Project you have proposed will be considered a community development project if it satisfies the following four criteria established in the OCC's definition of permitted public welfare investment.
The first criterion is that the Joint CD-Project primarily benefit low- and moderate-income persons and families or small businesses, including minority-owned small businesses. 12 C.F.R. § 24.4. While you have expressed your interest in providing jobs for low- to moderate-income persons, you have not provided a plan as to how this objective will be accomplished. Your plan should articulate a detailed scheme that would ensure the achievement of your objectives.
Second, the Joint CD-Project must address community development needs that have not been met by the private market in one or more communities served by your banks. You stated in your letter that President of Company, with whom you plan to engage in the Joint CD-Project, was unable to secure the equity investment from local individuals necessary to obtain bank financing. You also stated that the Town/County, Industrial Development Board was unable to locate qualified individuals to participate in the development project. Subject to the continued absence of interest by the private market to develop the Town/County industrial park, it appears that, in fact, you may have identified a community development need that has not been met by the private market.
Third, you must demonstrate that there is nonbank community involvement in the Joint CD-Project indicating that the affected primary beneficiaries and representatives of local (or state) government have endorsed and demonstrated support for the Joint CD-Project. Based on your preliminary plans, we are unable to determine the extent of community-based or government support for the Joint CD-Project.
Fourth, the profits, dividends, tax credits and other distributions from the Joint CD-Project received by your banks must be devoted to activities that primarily promote the public welfare. You have not indicated whether you anticipate any profits, tax credits or other distributions or how you intend to utilize such gains.
In the event that you determine you cannot satisfy all of the above requirements, you may still be able to proceed with this activity, subject to express approval by the FDIC under section 24(a) of the Federal Deposit Insurance Act and 12 C.F.R. Part 362. To obtain such approval, you must file an application with the FDIC pursuant to 12 C.F.R. § 362.4.
We hope that we have successfully raised some issues for your consideration as you proceed in the planning of the Joint CD-Project. If you have any further questions, please do not hesitate to contact us.