MAY 26, 1993-OCC Issues New Real Estate Appraisal Rules to Reduce Costs that Can Restrict the Availability of Credit, by increasing the threshold level for required appraisals from $100,000 to $250,000, expanding exemptions, and identifying additional circumstances when appraisals are not required. (I/A)

MAY 27, 1993-Banking Agencies Issue Interagency Letter on Discrimination Concerns, announcing a strengthening and refining of fair lending enforcement activities and transmitting a list of 11 suggested measures by which banks could prevent illegal discrimination and improve access to credit by underserved groups. (I/A)

JUNE 10, 1993-OCC Announces Additional Credit Availability Initiatives that Improve the Availability of Credit to Businesses and Individuals, by changing regulatory reporting requirements, issuing joint policy statements on the valuation of real estate collateral, using the "special mention" category in reviewing loans, and improving the coordination of examinations. (I/A)

JULY 15, 1993-OCC Acts to Facilitate Community Development Investments, by issuing a new rule utilizing increased statutory authority permitting such investments.

AUGUST 2, 1993-OCC Announces CRA Reform Hearings, seeking input from the financial services industry, social scientists, and consumer and community representatives.

AUGUST 31, 1993-OCC Issues New Regulation on Disposal of OREO, easing bank restrictions and making OREO more available.

DECEMBER 8, 1993-OCC Proposes New CRA Regulation. OCC at the forefront of moving to performance-based assessments and a streamlined assessment method for small banks.

JANUARY 21, 1994-OCCIDOJ Settle the First National Bank of Vicksburg, Mississippi Lending Discrimination Case, the first settlement for violations under the Equal Credit Opportunity Act for a national bank.

MARCH 8, 1994—Bank Agencies Adopt the Joint Policy Statement on Lending Discrimination, joint statement by OCC, DOJ, HUD, FTC, and the other banking regulators that interpreted the fair lending laws, stated policies related to enforcement of those laws, and advised lenders on self-compliance measures. (I/A) APRIL 1994-OCC Forms Native American Working Group, aimed at improving the delivery of banking services to Native Americans.

JUNE 1994-Comptroller Initiates Community Outreach Program to directly learn of credit access concerns, holding over 15 forums with over 300 regional and local community development leaders across the country.

JUNE 2, 1994-OCC Creates Community and Consumer Law Division, as a step to help implement community, consumer, and fair lending laws.

FEBRUARY 9, 1995-OCC Grants First Community Development Financial Institution Charter.

APRIL 19, 1995—OCC Adopts Final CRA Regulation, creating performance-based standards.

DECEMBER 14, 1995—OCC Issues Risk Based Capital Guidelines for Sales of Small Business Obligations with Recourse, expanding bank lending capabilities to small businesses.

FEBRUARY 20, 1996-OCC Names District Community Reinvestment and Development Specialists, creating specialists in all the OCC district offices to help foster national bank involvement in community development.

FEBRUARY 22, 1996-OCC Holds Community Development Conference, convening the largest conference of its kind in OCC history, with over 500 attendees. JUNE 3, 1996-OCC Establishes CRA Web Site, to give the public broader access to information about the national banking industry.

SEPTEMBER 17, 1996-Comptroller Announces Changes to Part 24, launching major initiative to stimulate investment in low- and moderate-income housing, including empowerment zones.

SEPTEMBER 20, 1996-Secretary Rubin Announces the Creation of the Consumer Electronic Payments Task Force, Chaired by Comptroller Ludwig, to study how emerging electronic payment products will affect consumers and whether these products will be available and beneficial to low- and moderate-income persons.

SEPTEMBER 30, 1996-OCC Waives Application Fees for New Charter and Branch Applications in Low- and Moderate-Income Areas, acting to improve access to financial services for low- and moderate-income consumers.

OCTOBER 1, 1996-OCC Sponsors Seminars on Federal Low-Income Housing Tax Credits, actively marketing tax incentives for low- and moderate-income housing. NOVEMBER 1996-OCC Announces it is Conducting Community Development Best Practices Study, a study of national banks' loans and investments that benefit their communities. The purpose of the study is to provide banks and other financial institutions, agency personnel, community development organizations and the public with information about successful strategies that promote affordable singleand multi-family developments and small business growth.

NOVEMBER 20, 1996-OCC Issues Revised Part 5, expanding activities that may benefit underserved communities, and enhancing the availability of assets and income for community reinvestment purposes.

JANUARY 9, 1997-OCC Publishes Community Development Finance: Tools and Techniques for National Banks, a reference work designed to continue stimulating creative and profitable community development lending and investment opportunities.

JANUARY 22, 1997-OCC Publishes "New Opportunities to Excel: Outstanding CRA Actions for Community Banks," spotlighting Community Reinvestment Act performance of small national banks. The pamphlet is intended to recognize the efforts of some of the community bankers who have made the revised CRA work for them, and most importantly, to provide examples, inspiration, and ideas to other small banks throughout the country.

FEBRUARY 12, 1997-OCC Holds Industry Forum on Financial Access in the 21st Century, convening leaders from a variety of sectors-banking, bank vendor, nonbank financial institution, check cashing, community development, academic, and government-who would not otherwise meet in substantive discussions. FEBRUARY 20, 1997-OCC Announces the Availability of its New Online Community and Consumer Organizations Database. The database, available through the Internet, will function as a registry to help identify local contacts for CRA examinations and for community and consumer input to the agency's supervisory and regulatory processes.

FEBRUARY 25, 1997-OCC Issues Advisory on Community Development Securities that informs national banks of the standards that the community development securities must meet to qualify under the authority granted by the investment securities regulation, 12 C.F.R. Section 1. It also explains the treatment of these investments under the CRA regulation, 12 C.F.R. Section 25.

MARCH 14, 1997-OCC Forms National Access Committee, to conduct research on access to financial services, oversee an initiative to extend the frontiers of banking to households who are not now bank customers, conduct research on the impact of credit scoring on access to banking services, and analyze how on-line banking may be used to facilitate access to financial services.

Introduction and Summary Conclusion

The attached final rule includes changes to the OCC's operating subsidiary regulation that clarify, expand upon and restate the standard for determining the scope of permissible operating subsidiary activities. The standard provides that a national bank may apply to engage by means of an operating subsidiary in activities that are part of, or incidental to, the business of banking under 12 U.S.C. 24(Seventh), and other activities permitted for national banks or their subsidiaries under other statutory authority. The new rule also includes a notice and comment procedure and establishes special requirements for any operating subsidiary that desires to engage in an activity that could not be directly engaged in by the parent national bank. This makes explicit what has always been implicit, reflects the fact, as discussed below, that the OCC and the courts have occasionally permitted national banks to engage in activities through the use of subsidiary companies that the banks could not directly perform, and offers an improved mechanism for OCC initial decisionmaking with respect to an ongoing supervision of such activities.

This standard is fully consistent with the authority of national banks to own subsidiaries and the permissible activities of those subsidiaries. National banks may conduct the business of banking and activities incidental thereto through subsidiaries. This authority is derived from the powers sentence in 12 U.S.C. 24(Seventh). A national bank subsidiary too may engage in activities that are part of or incidental to the business of banking within the meaning of 12 U.S.C. 24(Seventh). In some instances, this may include an activity that its parent national bank cannot conduct directly, where limitations have been imposed on the parent bank's ability to conduct an activity that could otherwise qualify as part of the business of banking or incidental thereto and those limitations do not apply to the bank's subsidiary. This could be the case, for example, if the limitation itself and the reason or rationale for limiting the parent bank's ability to conduct the banking or incidental-to-banking activity does not apply to the subsidiary, and if the ability of the subsidiary to conduct the activity would not frustrate a Congressional purpose of preventing the activity from being undertaken by its parent bank.

Operating subsidiary applications involving a banking or incidental-to-banking activity that a national bank may not conduct directly therefore must be evaluated on a case-by-case basis. For each activity, the OCC must consider the particular activity at issue, and for that activity, the OCC must weigh: (1) the form and specificity of the restriction applicable to the parent bank, (2) the reason why the restriction applies to the parent bank, and (3) whether it would frustrate the Congressional purpose underlying the restriction to permit the bank's subsidiary to engage in the particular activity. The existence of regulatory safeguards on operating subsidiaries, as well as tailored conditions imposed in connection with particular application approvals, are additional considerations that the OCC may properly take into account in weighing the foregoing factors.

Discussion

1. THE POWERS SENTENCE IN SECTION 24(SEVENTH) ALLOWS NATIONAL BANKS TO OWN SUBSIDIARIES AS AN INCIDENT TO BEING IN BUSINESS.

It is common for businesses in the United States to deliver some of their products or services to customers by means of subsidiaries. There is no reason in law or policy to ban national banks from the enjoyment of this ordinary corporate flexibility in the conduct of their affairs.

The first sentence in 12 U.S.C. 24(Seventh) specifies the powers that a national bank may exercise. Aside from some clarifying changes in punctuation, it has not been changed from the time of its enactment as part of the National Bank Act in 1864 to today. It states that a national bank may exercise "all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions of title 62 of the Revised Statutes."

This powers sentence can be broken conceptually into several components. A national bank is expressly authorized to carry on the business of banking, and to exercise "all such incidental powers as shall be necessary" to do banking. "Necessary" has been judicially_construed to mean "convenient and useful," see Arnold Tours, Inc. v. Camp, 472 F.2d 427 (1st Cir. 1972). The sentence then gives five examples of the expressly-authorized business of banking.

In NationsBank of North Carolina, N.A. v. Variable Annuity Life Insurance Co., 115 S.Ct. 810, 130 L.Ed. 2d 740 (1995) ("VALIC"), the Supreme Court confirmed that a national bank's permissible activities are not limited to the five examples in the powers sentence and things incidental thereto. The Comptroller has discretion, within reasonable bounds, to permit banking activities beyond those the statute sets forth as exemplary, id. at 814, n.2. This interpretive approach applies both to the nature of the bank's products and services and to the manner of their delivery.

There are at least two broad categories of recognizable activities (exercises of powers), which are either part of or incidental to the conduct of the business of banking, even though they are not specifically listed in the powers sentence. The first identifiable category involves "banking" activities or activities "incidental" to the delivery of banking products or services. One of the examples in the powers sentence list is lending on personal security; it is clearly part of banking. Lending on bases other than "personal security" would be a banking activity of the same type, even though not expressed. It is not incidental to banking, but is a part of banking per se. In M & M Leasing Corp. v. Seattle First National Bank, 563 F.2d 1377 (9th Cir. 1977), cert. denied, 436 U.S. 956, the court upheld the OCC's determination that the bank's auto leasing activities amounted to a form of secured lending, and, therefore, permissible banking. One could break down the activity into component parts, and consider the bank's power to own automobiles as "incidental" to its conduct of the banking business, secured lending. When the transaction was viewed in its entirety, the bank was delivering a banking service. Countless examples of banking and incidental-to-banking activities could be recited, even though, of course, they are not listed in the powers sentence.

A second broad category of activities are incidental to the conduct of the banking business, and, therefore, permissible, even though they are not, substantively, banking activities. They are not incidental to the delivery of a banking product or service. Instead, they relate to the fact that the bank is in business, and can do things that a business does. Examples include such powers as having employees, issuing stock to raise capital, owning or renting equipment, and borrowing money for operations. These are all done, and are permissible powers, not because they relate to "banking" activities, but because they are necessary, or at least convenient and useful, components of conducting business. Congress in various Federal banking statutes has repeatedly recognized and regulated such business activities of banks qua business, without deeming it necessary to authorize them. They are "authorized" by the powers sentence in Section 24(Seventh). Thus, various statutes refer to duties of bank employees, and to things that can and cannot be done with bank stock, and place limits on the ownership of bank premises, assuming their existence in each case.

The final example offered-bank borrowing-is particularly instructive because it became the subject of a number of lawsuits in the late 19th and early 20th centuries. Again, borrowing is not banking (or an incidental banking activity). Most of us borrow, and we are not bankers. It is an aspect of being in business, and needing to raise funds from time-to-time to conduct the business. From 1864 until its repeal in 1982, a section of the National Bank Act (12 U.S.C. 82) imposed a capital-based

limitation on the amount a bank could borrow. It stated, "No association shall at any time be indebted, or in any way liable, to an amount exceeding" its capital, except on account of certain demands listed in the statute. The courts consistently upheld the authority of a national bank to borrow money, not by referring to this borrowing-limitations statute, 12 U.S.C. 82, but rather by deeming it to be an incident to the general conduct of the banking business under 12 U.S.C. 24(Seventh). See e.g., Wyman v. Wallace, 201 U.S. 230 (1905) (Borrowing is authorized under the statute permitting a national bank to conduct a general banking business); Aldrich v. Chemical National Bank, 176 U.S. 618 (1900) (A national bank may borrow money when this is necessary for its banking business); see also Auten v. U.S. National Bank, 174 U.S. 125 (1899).

The power to own a subsidiary corporation, and through it to deliver some services to customers, falls within this same category of activities that are lawful for a bank by virtue of the bank's being in business. It is permissible because it is part of being in business, and such corporate flexibility should not be denied to national banks any more than it is denied to other business entities. There is a limitation that logically follows from the fact that the national bank ownership authority is an incidental power contained in the Section 24(Seventh) powers sentence, however. Since that sentence limits the bank to the conduct of the banking business, and the exercise of powers incidental thereto, a logical boundary for the activities permissible for the bank's subsidiary are activities that are part of or incidental to the conduct of the banking business. Interpretation of the powers sentence in this manner preserves the overall scheme of Congressional regulation of the national banking system.

2. THE ADDITIONS TO SECTION 24(SEVENTH) BY THE 1927 AND 1933 ACTS

ACKNOWLEDGED, RATHER THAN ELIMINATED, THE POWER OF NATIONAL BANKS TO OWN OPERATING SUBSIDIARIES.

One of the examples of banking listed in the powers sentence in Section 24 (Seventh) is the "discounting and negotiating," i.e., the buying and selling, of "promissory notes, drafts, bills of exchange, and other evidences of debt." The sentence does not limit national banks' authority to buy and sell debt. Thus, it does not matter whether the instrument in question is a promissory note characterized as a loan note, or is a note, bond, debenture or other evidence of indebtedness characterized as a security. It does not matter whether the bank's purchase and sale activity in connection with the instrument (loan note or debt security) is for the account of customers or for its own account, or whether it constitutes trading, dealing, or underwriting. Intermediation with respect to all instruments that evidence a financial obligation is permissible banking so far as the powers sentence is concerned.

But, Congress since 1864 has placed limits upon the national banks' authority to buy and sell debt securities within the bank. It has done so not by changing the powers sentence, but by adding additional sentences following it in Section 24 (Seventh), and by adding other statutes. This was done to a small extent by the Act of February 25, 1927, popularly known as the McFadden Act, 44 Stat. 1224 et seq. ("1927 Act"), and more substantially by the Banking Act of 1933, 48 Stat. 162 et seq. (“1933 Act"). The securities-related provisions of the 1933 Act, contained in Sections 5, 16, 20, 21, and 32, are commonly referred to as Glass-Steagall provisions, after the main sponsors, and will sometimes be so referred to in this opinion.

Although the 1927 Act and especially the 1933 Act limited national banks' direct performance of investment banking activities, i.e., buying and selling evidences of debt which are securities, both statutes also acknowledged as lawful and subjected to regulation national bank ownership of subsidiary companies, that ownership having its source of authority in the powers sentence in Section 24(Seventh). In other words, the very laws which limited national banks' securities powers also reinforced the idea that the banks could continue to own and control affiliated companies that engage in the business of banking.

a. THE INVESTMENT SECURITIES AND THE SAFE DEPOSIT BUSINESS PROVISOS
ADDED TO SECTION 24(SEVENTH) BY THE 1927 ACT CONFIRMED AND
REGULATED NATIONAL BANKS' PURCHASE AND SALE of Debt SECURITIES AND
OWNERSHIP OF SUBSIDIARIES, RESPECTIVELY, BOTH OF WHICH ACTIVITIES
WERE BEING DONE UNDER THE AUTHORITY OF THE POWERS SENTENCE.

In the 1927 Act, Congress gave its first careful attention to national banks' ownership of subsidiaries, and their purchase and sale activity with debt securities. Both the express terms and the legislative history of the statute demonstrate that the intention was to regulate these aspects of the banking business, conducted under the authority of the powers sentence.