FAQ - Formation of a National Bank Subsidiary Community Development Corporation

The following questions and answers provide information 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?
What are the benefits of forming a bank-owned CDC?
What types of community development activities can a CDC support?
Do bank-owned CDCs have special powers beyond those of the bank itself?
How is a bank protected from unlimited liability?
What are the benefits of using bank-owned CDCs versus third-party entities?
What should a bank consider when deciding if a bank-owned CDC should be a subsidiary of the bank or an affiliate of the bank holding company?
How do banks report investments in bank-owned CDCs?
Can a bank-owned CDC be certified as a CDFI?
Where can additional information be found?

What are national bank subsidiary Community Development Corporations (CDCs), and why are they formed?

A bank-owned CDC is a legal entity established by a national bank to make investments that qualify as Public Welfare Investments (PWIs) under the authority of 12 USC 24 (Eleventh) and 12 CFR Part 24. These investments must primarily benefit low- and moderate-income (LMI) individuals, LMI areas, other areas targeted by a governmental entity for redevelopment, or would receive consideration under 12 CFR 25.23 as a “qualified investment” for purposes of the Community Reinvestment Act (CRA).

Banks form CDCs to promote the public welfare through activities such as affordable housing development, small business support, and the revitalization of blighted neighborhoods. A CDC is considered a type of community and economic development entity (CEDE) ^[1] and can be structured either as a subsidiary of the bank or as an affiliate of its holding company.

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

Banks form wholly owned CDCs to advance their community development initiatives. The key benefits of forming a CDC include:

Centralized community development expertise: Housing community development activities within a dedicated CDC allows banks to centralize their community development efforts by bringing together expertise from different areas within the organization and streamlining operations. This structure promotes coordination of PWIs across business lines and enhances the bank’s brand presence, visibility, and impact in the community.

Risk management and liability protection: A CDC is a separate legal entity, which limits the bank’s liability for its investment in the CDC. Under 12 CFR 24.4, national banks are restricted from making PWIs that could expose them to unlimited liability. By channeling investments through a CDC, banks may reduce direct exposure to potentially higher-risk projects while maintaining regulatory compliance.

What types of community development activities can a CDC support?

A bank-owned CDC can engage in a broad range of activities, so long as they qualify as PWIs under 12 CFR 24.3. For example, CDCs have engaged in:

Acquiring, rehabilitating, constructing, and selling residential, commercial, or industrial properties.
Providing equity investments or debt financing to small businesses, especially those located in LMI or underserved communities.
Participating in tax credit programs such as Low-Income Housing Tax Credits, New Markets Tax Credits, Historic Tax Credits, or similar federal, state, or local credit programs that support community development.

Do bank-owned CDCs have special powers beyond those of the bank itself?

No. Bank-owned CDCs do not have special powers beyond those of the bank itself. Rather, CDCs serve as vehicles for making PWIs that the bank is already authorized to undertake under 12 USC 24 (Eleventh) and 12 CFR 24.

All activities conducted by a CDC must comply with the public welfare investment authority. This means they must primarily benefit LMI individuals, LMI areas, or other areas targeted for redevelopment by a governmental entity, or would receive consideration under 12 CFR 25.23 as a “qualified investment” for purposes of the CRA.

CDC activities must remain consistent with what the bank itself is permitted to do. Therefore, bank-owned CDCs do not have expanded authority or powers beyond those available to the bank.

How is a bank protected from unlimited liability?

A CDC’s corporate separateness protects the bank from the CDC’s debts and liabilities. A CDC’s operations should be reviewed to ensure that it maintains a separate corporate identity. As long as the CDC maintains a distinct corporate identity—with its own governance, finances, and operations—the bank is generally not liable beyond its investment in the CDC. However, if a CDC fails to maintain its separateness, the parent could become liable for the debts and obligations of the CDC, be 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.

The "Related Organizations" booklet of the Comptroller's Handbook additional information on how banks should structure and manage CDCs to ensure legal separateness and protect the bank from liability.

What are the benefits of using bank-owned CDCs versus third-party entities?

A bank-owned CDC is one type of CEDE that qualifies under 12 CFR 24.3 to make public welfare investments. Banks can also make PWIs by partnering with other CEDEs including third-party entities such as community development financial institutions (CDFIs), nonprofits, or real estate entities.^[2]Each approach has its advantages.

Benefits of using bank-owned CDCs

A bank-owned CDC gives the bank direct control over community development investments and alignment with its community development goals.
CDCs offer banks greater flexibility in structuring, managing, and monitoring investments compared to investing in external entities, which may have their own operational constraints or priorities.

Benefits of using third-party entities

Partnering with third-party entities allows banks to meet community development goals without the need for internal capital, staffing and oversight to manage a CDC.
Third-party entities, such as CDFIs and real estate developers, often have specialized expertise and proven track records in community development that banks can leverage.
These organizations typically have longstanding relationships with community stakeholders, enabling banks to extend their reach and impact more effectively.

What should a bank consider when deciding if a bank-owned CDC should be a subsidiary of the bank or an affiliate of the bank holding company?

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 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).

Capital

Affiliate—If the bank upstreams payments to the holding company to fund the CDC, the bank’s regulatory capital could be reduced either through a reduction in retained earnings (dividend) or reduction in capital.

Subsidiary—Capital contributions to a consolidated CDC subsidiary generally do not reduce the bank’s regulatory capital because the subsidiary’s assets, liabilities, and equity are included on the bank’s consolidated balance sheet. If third parties also invest in the CDC subsidiary, the resulting minority interest may be recognized in the bank’s regulatory capital, subject to applicable limits.

Dividend Capacity

Affiliate—If the bank provides funding to the CDC through upstream dividend payments to the holding company, those payments reduce the bank’s retained earnings and therefore reduce the bank’s future dividend paying capacity. Dividend capacity increases only as future earnings replenish retained earnings.

Subsidiary—A bank’s investment in a consolidated CDC subsidiary does not reduce the bank’s dividend-paying capacity. Since the subsidiary is consolidated with the bank, the CDC’s positive earnings would increase the bank’s retained earnings and capacity, while any losses would reduce the bank’s capacity.

CDC's Earnings

Affiliate—When the CDC is a consolidated subsidiary of the holding company, the CDC’s profits accrue to the holding company. The bank receives no direct earnings benefit from the CDC’s performance.

Subsidiary—When the CDC is a consolidated subsidiary of the bank, the CDC’s earnings and losses are included in the bank’s consolidated financial results. The bank captures the CDC’s economic performance in proportion to the bank’s ownership percentage.

Affiliate Transaction Limits (sections 23A and 23B of the Federal Reserve Act)

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.

Regulation

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.

How do banks report investments in bank-owned CDCs?

While the creation of a bank-owned CDC itself does not require prior OCC approval, the bank’s investment in the CDC must comply with the requirements under 12 CFR 24. Depending on the circumstances, banks must provide an after-the-fact notification or seek prior OCC approval.^[3] In either case, banks complete the OCC’s CD-1 National Bank Community Development Public Welfare Investments form. Each public welfare investment that the CDC makes must meet the requirements outlined in 12 CFR 24.3.

A bank may access and submit the form electronically through OCC’s BankNet. A bank also may access and download a PDF version of the CD-1 form from the OCC’s website.

After-the-Fact notification

Banks eligible to provide after-the-fact notifications may make public welfare investments in CDCs without prior OCC approval. They should, however, notify the OCC within 10 working days of making the investment in the CDC. The requirements for after-the-fact notifications are described in 12 CFR 24.5(a).

As outlined in 12 CFR 24.2(e), a bank eligible to provide after-the-fact notifications is:

Well capitalized;
Has a composite rating of 1 or 2 under the Uniform Financial Institutions Rating System;
Has a Community Reinvestment Act (CRA) rating of “Outstanding” or “Satisfactory”; and
Is not subject to a cease-and-desist order, consent order, formal written agreement, or Prompt Corrective Action directive, unless it has been informed in writing by the OCC that the bank may be treated as an “eligible bank” for purposes of 12 CFR 24.

If a bank does not meet all of these criteria, it will not be eligible to provide an after-the-fact notification. Instead, the bank will need to submit a prior approval request to the OCC, as described below.

To provide an after-the-fact notification, a bank’s investment must meet the tests for qualifying public welfare investments (12 CFR 24.3) and investment limits (12 CFR 24.4). A bank’s investment should be consistent with the examples of qualifying public welfare investments found in 12 CFR 24.6. Furthermore, the investment entity’s structure generally should be consistent with the list of examples of the types of CEDEs found in 12 CFR 24.2(c).

Prior approval

If either the bank does not meet the criteria to be considered an eligible bank or if 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 investment. See 12 CFR 24.5(b).

In addition, the bank will need to seek permission from the OCC and submit a prior approval request in any of the following situations:

The bank’s aggregate public welfare investments, including the proposed investment, exceed 5 percent of its capital and surplus (unless special permission has been granted by the OCC to exceed the limit). In no event may a bank’s aggregate public welfare investments exceed 15 percent of its capital and surplus.
The CDC will undertake activities associated with properties carried on the bank’s books as “other real estate owned.”
The proposed investment would expose the bank to unlimited liability.

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).

The OCC generally will notify a bank of the agency’s decision in writing within 30 days after receiving the request. It may extend the review period by notifying the bank.

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

Can a bank-owned CDC be certified as a CDFI?

According to the United States Treasury Department, a bank-owned CDC seeking certification as a community development financial institution (CDFI) must not only meet the CDFI requirements on its own but must also comply with a collective review of relevant affiliates, even if those affiliates are not seeking certification.

Treasury Department regulations require that the CDFI certification primary mission requirements must be met by all entities subject to the collective review process. The review includes ensuring a current governing leadership-approved primary mission of community development is in place; reviewing financial product or financial services activities; and checking for demonstrated accountability and governance with respect to the CDFI certification target market.^[4]

For more information, visit the CDFI Fund’s CDFI Certification page.