Community Reinvestment Act and Tax Credits

The Community Reinvestment Act (“CRA”), enacted by Congress in 1977 (12 U.S.C. § 2901) and implemented by Regulations 12 CFR §§ 25, 228, 345, and 563e, is intended to encourage certain financial institutions to help meet the credit needs of the communities in which they operate. Pursuant to 12 CFR § 25, national banks are required to undergo a CRA assessment by the Office of the Comptroller of the Currency (“OCC”). The assessment involves CRA compliance tests and an overall CRA compliance rating. In order to receive credits towards higher ratings, national banks may invest in or lend to Low Income Housing Tax Credit (“LIHTC”) projects, New Market Tax Credit (“NMTC”) projects, and Historic Tax Credit (“HTC”) projects.

In enacting the CRA, Congress required each appropriate federal financial supervisory agency to assess an institution's record of helping to meet the credit needs of the local communities in which the institution is chartered, consistent with the safe and sound operation of the institution. 12 CFR § 25. Each assessment includes tests for CRA compliance and an overall rating based on that compliance. The ratings scale and assessment tests, relevant to the OCC and national banks, are codified in 12 CFR § 25. The OCC has authority to assess all national banks including wholesale national banks, limited purpose national banks, and small and intermediate national banks.

Pursuant to 12 CFR § 25, the lending test evaluates a national bank’s record of helping to meet the credit needs of its assessment areas through its lending activities by considering a bank’s home mortgage, small business, small farm, and community development lending. If consumer lending constitutes a substantial majority of a bank’s business, the OCC will evaluate the bank’s consumer lending in one or more of the following categories: motor vehicle, credit card, home equity, and other secured and unsecured loans.  In addition, at a bank’s option, the OCC will evaluate one or more categories of consumer lending only if the bank has collected and maintained the data for each category that the bank elects to have the OCC evaluate.  The OCC considers originations, purchases of loans, and other loan data the bank may choose to provide, including data on loans outstanding, commitments, and letters of credit.  A bank may ask the OCC to consider loans originated or purchased by consortia in which the bank participates (or by third parties in which the bank has invested) only if the loans meet the definition of community development loans.

The OCC evaluates a bank’s lending performance pursuant to Lending Activity (the number and amount of the bank’s home mortgage, small business, small farm, and consumer loans, if applicable, in the bank’s assessment areas).  The OCC also evaluates Geographic Distribution (the geographic distribution, dispersion and proportion, of the bank’s products between low, moderate, middle, and upper income geographies in the bank’s assessment areas) and Borrower Characteristics (the distribution of the bank’s products between low, moderate, middle, and upper income individuals and businesses). The assessment also includes Community Development Lending (the bank’s community development lending, including the number and amount of community development loans, and their complexity and innovativeness) and Innovative or Flexible Lending Practices (the bank’s use of innovative or flexible lending practices in a safe and sound manner to address the credit needs of low or moderate income individuals or geographies). Lending by affiliates or in consortium may also be considered if applicable.

The investment test evaluates a bank’s record of helping to meet the credit needs of its assessment areas through qualified investments that benefit its assessment areas or a broader statewide or regional area that includes the bank’s assessment areas.  Activities considered under the lending or service tests may not be considered under the investment test.  At a bank’s option, the OCC will consider, in its assessment of a bank’s investment performance, a qualified investment made by an affiliate of the bank, if the qualified investment is not claimed by any other institution. Donating, selling on favorable terms, or making available on a rent-free basis a branch of the bank that is located in a predominantly minority neighborhood to a minority depository institution or women’s depository institution will be considered as a qualified investment.

The OCC evaluates the investment performance of a bank pursuant to: “(1) The dollar amount of qualified investments; (2) The innovativeness or complexity of qualified investments; (3) The responsiveness of qualified investments to credit and community development needs; and (4) The degree to which the qualified investments are not routinely provided by private investors.”

The service test evaluates a bank’s record of helping to meet the credit needs of its assessment areas by analyzing both the availability and effectiveness of a bank’s systems for delivering retail banking services and the extent and creativity of its community development services.  Community development services must benefit a bank’s assessment areas or a broader statewide or regional area that includes the bank’s assessment areas.  At a bank’s option, the OCC will consider, in its assessment of a bank’s service performance, a community development service provided by an affiliate of the bank, if the community development service is not claimed by any other institution.

The OCC evaluates community development services pursuant to “the extent to which the bank provides community development services, and the creativity and responsiveness of community development services.”

The OCC applies the small bank performance standards in evaluating the performance of a small bank or a bank that was a small bank during the prior calendar year, unless the bank elects to be assessed as a large bank.  A small bank may elect to be assessed as a large bank only if it collects and reports certain data required for other large banks.

For intermediate small national banks with over $280 million but less than $1.122 billion in assets, performance also is evaluated pursuant to: “(1) The number and amount of community development loans; (2) The number and amount of qualified investments; (3) The extent to which the bank provides community development services; and (4) The bank’s responsiveness through such activities to community development lending, investment, and services needs.”

At the national bank’s request, the OCC will assess a bank’s record of helping to meet the credit needs of its assessment areas under a strategic plan if the bank has submitted the plan to the OCC, the OCC has approved the plan, the plan is in effect, and the bank has been operating under an approved plan for at least one year.  A plan may have a term of no more than five years, and any multi-year plan must include annual interim measurable goals under which the OCC will evaluate the bank’s performance.  Other variables must be met if a bank chooses to implement CRA compliance by way of a strategic plan.

A national bank must delineate one or more assessment areas within which the OCC evaluates the bank’s record of helping to meet the credit needs of its community. The OCC does not evaluate the bank’s delineation of its assessment areas as a separate performance criterion, but the OCC reviews the delineation for CRA compliance.   A bank may adjust the boundaries of its assessment areas to include only the portion of a political subdivision that it reasonably can be expected to serve.  The OCC uses the assessment areas delineated by a bank in its evaluation of the bank’s CRA performance unless the OCC determines that the assessment areas do not comply with the requirements set for in the CFR.

The OCC assigns to a bank a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance” based on the bank’s performance under the lending, investment and service tests, the community development test, the small bank performance standards, or an approved strategic plan, as applicable.  Each area’s rating is compiled into the bank’s overall rating which is published by the OCC.

Low Income Housing Tax Credit projects are qualified investments under the CRA. CMTY. AFFAIRS DEP’T., OFFICE OF THE COMPTROLLER OF THE CURRENCY, COMMUNITY DEVELOPMENTS FACT SHEET: LOW-INCOME HOUSING TAX CREDIT PROGRAM 1, 2 (Oct. 2009).  LIHTC projects receive full favorable consideration during the assessment process.

The LIHTC program creates market incentives for the acquisition and development or rehabilitation of affordable rental housing.  The LIHTC program authorizes state housing credit agencies to award 9 percent and 4 percent federal tax credits to developers of affordable rental housing.  The tax credits are used by developers to raise equity financing for their projects.  The equity capital generated from the tax credits lowers the debt burden on LIHTC properties, making it easier for owners to offer lower, more affordable rents; while investors, such as banks obtain a dollar for dollar reduction in their federal tax liability.

Under the authority of the Internal Revenue Service, state housing credit agencies to administer the LIHTC programs through qualified allocation plans. States are allowed to set specific allocation criteria for awarding tax credits and must develop qualified allocation plans that identify and prioritize housing needs, especially for low-income renter households.  State housing credit agencies award tax credits to developers based on the housing needs identified and selection criteria established.

Investments are typically structured as real estate limited partnerships or limited liability companies.  A national bank, as a limited partner or member, can generate additional returns with the pass through of depreciation and cash flow in these real estate investments.

In addition to reducing federal tax liability and earning returns, banks receive positive CRA consideration for LIHTC project investments, provided they benefit a bank’s assessment area.  Banks may receive positive CRA consideration for investments made in LIHTC projects and funds that benefit a broader statewide or general area that includes the bank’s assessment areas, provided that they have otherwise adequately addressed the community development needs of their assessment areas.  Banks will also receive CRA consideration if they provide predevelopment financing or construction/permanent financing to LIHTC projects and funds.

The OCC has also stated that investments in Community Development Financial Institutions (“CDFI”) or investments in NMTC-eligible Community Development Entities (“CDEs”) are qualified investments under the CRA. CMTY. AFFAIRS DEP’T., OFFICE OF THE COMPTROLLER OF THE CURRENCY, COMMUNITY DEVELOPMENTS FACT SHEET: NEW MARKET TAX CREDITS 1 (Oct. 2010).

The NMTC program is an economic development tax incentive administered by the United States Department of the Treasury CDFI Fund.  The purchase of NMTCs by investor banks provides equity capital to further commercial economic development activities in underserved geographies.  NMTCs are allocated by CDFI to CDEs under a competitive application process.

National bank investors receive a credit against federal income taxes for making qualified equity investments in CDEs.  NMTCs, when combined with interest income on loans to small businesses located in underserved geographies can provide banks with competitive returns.   In order to utilize CDEs, a bank can form a subsidiary CDE and apply to the CDFI Fund for allocation of NMTCs.  Also, a bank can invest in another entity’s CDE.  Some non-bank CDEs that have received NMTC allocations are seeking investors to provide equity by purchasing the tax credits.

Some projects that receive Historic Tax Credits may also meet the definition of community development in the CRA regulation and therefore may receive favorable CRA consideration. CMTY. AFFAIRS DEP’T., OFFICE OF THE COMPTROLLER OF THE CURRENCY, COMMUNITY DEVELOPMENTS FACT SHEET: HISTORIC TAX CREDIT PROGRAM 1, 2 (Oct. 2009).

The HTC program encourages the rehabilitation of certified historic buildings through the provision of tax credits to property owners equal to twenty percent of the qualified renovation expenditures.  The program is used to attract new private capital to historic centers and main street towns across the nation. To receive HTCs, property owners must complete a three-part historic preservation certification application process administered by the National Park Service and respective state historic preservation officers.

Typically, if developers of HTC projects cannot use the credits, they will offer the credits to third parties, including banks, to raise the funding for a project and thereby reduce the financing costs for property rehabilitation.  National banks seeking to provide financing to HTC projects must either request prior OCC approval or submit an after-the-fact notice to the OCC, depending on the bank’s safety and soundness profile, CRA performance, and the nature of the project financing.