Letter opines that a bank's investment in connection with the New Markets Tax Credit program in a "Community Development Entity" (CDE), or a loan by a bank CDE to a "Qualified Active Low-Income Community Business" or another CDE, would received consideration as a qualified investment or a community development loan, respectively, when the institution's Community Reinvestment Act performance is evaluated.

O

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #984

December 17, 2003 February 2004

12 USC 2901

Subject:

New Markets Tax Credits

Dear [ ]:

This letter responds to your inquiry whether a financial institution’s investment in connection

with the New Markets Tax Credit (NMTC) Program in a “Community Development Entity”

(CDE), or a loan by a financial institution CDE to a “Qualified Active Low-Income Community

Business” (QALICBs) or another CDE, would receive consideration as a qualified investment or

a community development loan, respectively, when the institution’s Community Reinvestment

Act (CRA) performance is evaluated. We conclude that such investments and loans would be

favorably considered under the CRA.

New Markets Tax Credit Program

The NMTC Program (Program) was a part of the Community Renewal Tax Relief Act of 2000.1

The Program was expected to stimulate investments that, in turn, would facilitate economic and

community development in distressed communities.2

The Program created a tax credit for taxpayers’ “Qualified Equity Investments” (QEIs) in

CDEs.3 A CDE is a domestic corporation or partnership that is an intermediary vehicle for the

provision of loans, investments, or financial counseling in “Low-Income Communities” (LICs).4

CDEs must demonstrate that they (1) have a primary mission of serving, or providing investment

capital for, LICs or low-income persons and (2) are accountable to residents of the LICs that they

serve. CDEs are required to invest “substantially all” (generally 85 percent) of the proceeds of

1 H.R. 5662, introduced on Dec. 14, 2000. Section 121(a) of Subtitle C of Title I of H.R. 5662 was enacted by

section 1(a)(7) of the Consolidated Appropriations Act of 2001, Pub. L. 106-554 (Dec. 21, 2000)

untable to residents of the LICs that they

serve. CDEs are required to invest “substantially all” (generally 85 percent) of the proceeds of

1 H.R. 5662, introduced on Dec. 14, 2000. Section 121(a) of Subtitle C of Title I of H.R. 5662 was enacted by

section 1(a)(7) of the Consolidated Appropriations Act of 2001, Pub. L. 106-554 (Dec. 21, 2000).

2 See, e.g., Guidance, New Markets Tax Credit Program, 66 Fed. Reg. 21,846 (May 1, 2001).

3 See 26 U.S.C. § 45D. Over a seven-year period, an investor may claim a tax credit of 39 percent (30 percent in

present value terms) of the amount of its QEI.

4 LICs are census tracts with a poverty rate of at least 20 percent, or census tracts where the median family income is

below 80 percent of the area median family income.

the QEIs into LICs, including loans or investments in QALICBs.5 In addition to investments in

QALICBs, other “Qualified Low-Income Community Investments” (QLICIs) for CDEs are

equity investments in, or to, another CDE; the purchase of a QLICI loan from another CDE; and

financial counseling and other services to businesses located in, or residents of, LICs.

Community Development Financial Institutions and Specialized Small Business Investment

Companies are automatically eligible to be designated as CDEs, but must complete an

abbreviated application. Insured depository institutions with a primary mission of serving LICs

or low-income persons, and with accountability to the LIC,6 also may be designated as CDEs.

Community Reinvestment Act

Community development loans and qualified investments are important considerations in

financial institutions’ CRA performance evaluations. For larger banks, which are evaluated

under the lending, investment and service tests, examiners routinely evaluate both community

development loans and qualified investments

lity to the LIC,6 also may be designated as CDEs.

Community Reinvestment Act

Community development loans and qualified investments are important considerations in

financial institutions’ CRA performance evaluations. For larger banks, which are evaluated

under the lending, investment and service tests, examiners routinely evaluate both community

development loans and qualified investments. For smaller institutions, community development

loans are routinely included when determining an institution’s loan-to-deposit ratio, while

qualified investments that are lending-related are considered along with an institution’s loans. In

addition, examiners will consider a small institution’s other qualified investments if a small

institution wishes to be considered for an “Outstanding” rating. Along with community

development services, community development loans and qualified investments comprise the

basis for the CRA performance evaluation for wholesale and limited purpose institutions that are

evaluated under the community development test. Finally, institutions that are evaluated under

an approved strategic plan may include community development loans and qualified investments

in their measurable goals.

A “community development loan”

• has a primary purpose of community development; and,

• except in the case of wholesale or limited purpose banks,

5 In order to qualify as a QALICB, and therefore be eligible to receive CDE investments, a business must meet the

following criteria:

•

At least 50 percent of the total gross income is from the active conduct of a qualified business in LICs;

•

At least 40 percent of the use of the tangible property of the business is located in LICs;

•

At least 40 percent of the services provided by the business’ employees are performed in LICs;

•

Less the five percent of the average of the aggregate unadjusted bases of the property is attributable to

collectibles (e.g., art and antiques), other than tho

conduct of a qualified business in LICs;

•

At least 40 percent of the use of the tangible property of the business is located in LICs;

•

At least 40 percent of the services provided by the business’ employees are performed in LICs;

•

Less the five percent of the average of the aggregate unadjusted bases of the property is attributable to

collectibles (e.g., art and antiques), other than those held for sale in the ordinary course of business (i.e.,

inventory); and

•

Less than five percent of the average of the aggregate unadjusted bases of the property is attributable to

nonqualified financial property (e.g., debt instruments with a term in excess of 18 months).

(The gross income test is deemed to be met if either the tangible property or the services test is at 50 percent or

higher.)

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6 “Accountability” to the LIC may be demonstrated, for example, through representation by residents of the LIC on

a governing board or advisory board of a corporate CDE.

o has not been reported or collected by the institution or an affiliate for

consideration in the institution’s assessment as a home mortgage, small business,

small farm, or consumer loan, unless it is a multifamily dwelling loan; and

o benefits the institution’s assessment area(s) or a broader statewide or regional area

that includes its assessment area(s).7

A “qualified investment” is a “lawful investment, deposit, membership share, or grant that has as

its primary purpose community development.”8

“Community development” means:

1. Affordable housing (including multifamily rental housing) for low- or moderate-income

individuals;

2. Community services targeted to low- or moderate-income 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; or

4

-income

individuals;

2. Community services targeted to low- or moderate-income 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; or

4. Activities that revitalize or stabilize low- or moderate-income geographies.9

Discussion

Would a financial institution’s investment in a CDE receive consideration as a qualified

investment during the institution’s CRA evaluation?

An institution’s equity investment in a CDE would receive consideration as a qualified

investment if the investment benefits the institution’s assessment areas or a broader statewide or

regional area that includes its assessment areas. Such investments may be considered to have a

community development purpose under two prongs of the “community development” definition.

First, to the extent that the CDE loans or invests in small businesses or farms, the qualified

investment in the CDE promotes economic development by financing small businesses or farms.

Second, because the primary mission of the CDE is to serve LICs, the loans and investments

made by the CDE generally would help to revitalize or stabilize low- or moderate-income

geographies.

Would a loan by a financial institution CDE to a QALICB or to another CDE receive

consideration as a community development loan?

As long as a loan by a financial institution CDE to a QALICB or to another CDE has not been

reported or collected by the institution or an affiliate for consideration in the institution’s

7 12 C.F.R. § 25.12(i).

8 12 C.F.R. § 25.12(s).

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3

9 12 C.F.R. § 25.12(h). Low- or moderate-income individuals have income that is less than 80 percent of the area

median income

ancial institution CDE to a QALICB or to another CDE has not been

reported or collected by the institution or an affiliate for consideration in the institution’s

7 12 C.F.R. § 25.12(i).

8 12 C.F.R. § 25.12(s).

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3

9 12 C.F.R. § 25.12(h). Low- or moderate-income individuals have income that is less than 80 percent of the area

median income. Low- or moderate-income geographies have a median family income that is less than 80 percent of

the area median income.

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4

assessment area as a home mortgage, small business, small farm, or consumer loan (unless it is a

multifamily dwelling loan), the loan would receive consideration as a community development

loan.10 Loans under $1 million to a QALICB or CDE by a retail institution would be reported as

small business loans. However, larger loans would be considered community development loans

because the loans have a primary purpose of community development, as discussed above.11 For

wholesale and limited purpose institutions, which are not evaluated on their small business

lending, loans of any amount to a QALICB or CDE would be considered community

development loans.

I trust this letter responds to your inquiry. I have shared this response with my colleagues at the

other bank and thrift regulatory agencies, and they concur with this analysis. If you have further

questions, please contact me at (202) 874-5750.

Sincerely,

-signed-

Michael S. Bylsma

Director

Community and Consumer Law Division

10 Of course, for retail institutions, the loan would also need to benefit the institution’s assessment areas or a broader

statewide or regional area that includes its assessment areas

es, and they concur with this analysis. If you have further

questions, please contact me at (202) 874-5750.

Sincerely,

-signed-

Michael S. Bylsma

Director

Community and Consumer Law Division

10 Of course, for retail institutions, the loan would also need to benefit the institution’s assessment areas or a broader

statewide or regional area that includes its assessment areas.

11 The analysis whether a loan by any retail institution to a CDE would be a community development loan would be

the same – if the loan is not reported or collected as a home mortgage, small business, small farm or consumer loan

(unless it is a multifamily dwelling loan), it would receive consideration as a community development loan.