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Community Developments Investments (Fall 2013)
How ‘Green’ Investments May Qualify for CRA Consideration
AWEAA worker at a Peachtree City, Ga., plant welds cranes and hydraulic excavators for use in turbine construction.
Sharon Canavan, Community Relations Expert, OCC
Loans and investments financing “green” buildings, energy-efficiency improvements, wind farms, solar panels, or other renewable energy systems do not in and of themselves qualify for positive consideration under the Community Reinvestment Act (CRA). Neither the CRA nor its implementing regulations specifically address these types of activities. If a loan or investment (activity) has a primary purpose of community development, as defined in the CRA regulation, however, the activity could receive positive CRA consideration, as long as the national bank’s or federal savings association’s (bank) geographic requirements also are met. An activity is considered to possess the requisite primary purpose of community development if a majority of the dollars or beneficiaries of the loan or investment meet one or more of the enumerated community development purposes.1
The CRA regulation defines community development as the following:
(1) Affordable housing (including multifamily rental housing) for low- or moderate-income (LMI) individuals;
(2) Community services targeted to LMI individuals;
(3) Activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration’s Development Company or Small Business Investment Company programs (13 CFR 121.301) or have gross annual revenues of $1 million or less;
(4) Activities that revitalize or stabilize
(i)LMI geographies;(5) Loans, investments, and services that
(ii) Designated disaster areas; or
(iii) Distressed or underserved nonmetropolitan middle-income geographies designated by the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and the OCC; or
(i) Support, enable, or facilitate projects or activities that meet the “eligible uses” criteria described in Section 2301(c) of the Housing and Economic Recovery Act of 2008 (HERA), Public Law 110-289, 122 Stat. 2654, as amended, and are conducted in designated target areas identified in plans approved by the U.S. Department of Housing and Urban Development in accordance with the Neighborhood Stabilization Program (NSP);
(ii) Are provided no later than two years after the last date funds appropriated for NSP are required to be spent by grantees; and
(iii) Benefit low-, moderate-, and middle-income individuals and geographies in the bank’s assessment area(s) or areas outside the bank’s assessment area(s) provided the bank has adequately addressed the community development needs of its assessment areas.
Thus, the installation of energy-generating equipment, in and of itself, is not a qualified activity, because this activity does not on its face meet any of the requirements listed above. There are instances, however, where wind energy-related loans or investments could potentially meet the CRA’s requirements.
For example, small loans to businesses that manufacture, install, or maintain wind energy generation equipment may receive positive CRA consideration under the review of a bank’s retail lending activities, particularly if the loans are made to businesses that have gross annual revenues of $1 million or less. To the extent that loans to such businesses also meet the definition of community development, examiners may discuss the community development aspects of the loans in the narrative portion of the bank’s CRA public performance evaluation.2
An investment in a manufacturer or installer of wind energy components that located to, or retained its location in, an LMI area where its activities will produce jobs for LMI individuals may qualify for CRA consideration because the activity meets the definition of community development by helping to revitalize or stabilize the area by creating jobs for LMI individuals and attracting or retaining businesses. The company need not be a small business, because there are no restrictions on business size as it relates to job creation or retention, or on business creation or retention under the definitions of revitalization and stabilization.3
Some investments in wind energy facilities are structured to take advantage of more than one type of tax credit. In a “twinned transaction,” a bank makes two separate equity investments into a single fund—one investment is allocated toward either an investment tax credit (or production tax credit) and another investment is allocated toward a new markets tax credit (NMTC). For example, the single fund uses the two equity contributions to invest in a community development entity (CDE), which in turn invests in a wind energy manufacturing or installation company that is a qualified active low-income community business. CRA consideration should be available for the entire amount represented by both investments in the single fund once the investment is made in the NMTC-eligible CDE, which is presumed to promote economic development.
Any loan to or investment in a Small Business Development Center, a Small Business Investment Company, a Rural Business Investment Company, a New Markets Venture Capital Company, or an NMTC-eligible CDE is presumed to promote economic development and, therefore, should qualify for CRA consideration.4 In addition, the fact that an investment into an NMTC-eligible entity is structured in a way to take advantage of an additional or different tax credit should not preclude CRA consideration for the full amount(s) invested in the CDE.
Bankers should refer to the “Interagency Questions and Answers Regarding Community Reinvestment” (www.ffiec.gov/cra/pdf/2010-4903.pdf) and 75 Fed. Reg. 47 (March 11, 2010), p.11642, for examples of qualifying community development activities. Bankers also should consult with their OCC supervisory offices to discuss the facts and circumstances of specific activities for which CRA consideration is desired.
1See 75 Fed. Reg. 11642, 11649 (March 11, 2010), at __.12(h)−8.
2Intermediate small banks making qualified community development loans to small businesses can opt to have the loans reviewed under the OCC’s lending test or the community development test. Large banks making loans qualifying as small business loans as well as community development loans can only report them as small business loans. Intermediate small banks have the option of having small loans to businesses that also meet the definition of community development loans considered under either the lending test or the community development test. For large banks, if a small loan to a business meets the definition of “small business loan” as well as the definition of “community development loan,” it may be reported only as a small business loan.
3Detailed information on what activities revitalize or stabilize an LMI geography can be found in the “Interagency Questions and Answers Regarding Community Reinvestment” at 75 Fed. Reg. 11645, 11647, and 11649 (March 11, 2010), p. 11642, at __.12(g)(4)(i)—1, __.12(g)—2, and __.12(h)—5 (at www.ffiec.gov/cra/pdf/2010-4903.pdf).
4Ibid., p.11646, __.12(g)(3)—1.