Opportunity Zones – Giving CRA Credit Where Credit is Due
The Office of the Comptroller of the Currency (OCC) is currently soliciting comments in connection with an advance notice of proposed rulemaking (ANPR) aimed at updating the regulations that implement the Community Reinvestment Act (CRA) of 1977. The original intent of the CRA was to help meet the credit needs of the communities that banks serve. The last time the CRA regulations were substantially revised was more than 20 years ago in 1995, so there is a considerable amount of attention being paid to the wide range of questions (altogether 31) posed in the ANPR.
One area on which the OCC is inviting comments is clarifying and broadening the range of activities supporting community and economic development that qualify for CRA consideration in banks' CRA performance evaluations, while retaining a focus on low- and moderate-income (LMI) populations and areas. The list of questions in this area is quite extensive and includes a number of examples of community development (CD) activities for possible CRA consideration.
While investing in opportunity zones (OZs) is not mentioned as a possible CD activity in the ANPR, it certainly deserves consideration when viewed through the lens of the OCC’s public welfare investment authority. More specifically, regulation 12 CFR 24 permits a national bank or national bank subsidiary to may make a public welfare investment directly or indirectly if at least one of the following applies to the bank’s investment:
- the investment primarily benefits low- and moderate-income (LMI) individuals;
- the investment primarily benefits LMI areas;
- the investment primarily benefits other areas targeted by a governmental entity for redevelopment, or · the investment would receive consideration as a “qualified investment” under 12 CFR 25.23 of the CRA.
According to an OCC Community Developments Fact Sheet, activities permissible under 12 CFR 24 include projects promoting economic development and job creation initiatives by producing or retaining jobs for LMI persons, developing and operating commercial or industrial properties in LMI areas, or financing small business and small farms in these targeted areas. These types of activities are consistent with the legislative intent of Opportunity Zones, which, according to the Internal Revenue Service (IRS) Opportunity Zones Frequently Asked Questions, is to spur economic development and job creation in distressed communities.
It is notable that the census tracts that Treasury designated as OZs are census tracts that have an individual poverty rate of at least 20 percent and median family income up to 80 percent of the area median. These are the same demographic thresholds used for the new markets tax credit (NMTC) that is considered a public welfare investment by the OCC. As for census tracts that have been designated as OZs but do not meet these demographic characteristics, there should still be CRA consideration provided the investments are particularly innovative complex, or impactful on the bank’s community.
The relevance of NMTCs to OZs through a CRA lens can be traced to the OCC’s “Interagency Questions and Answers Regarding Community Reinvestment” that refers to NMTCs promoting economic development. Furthermore, the OCC’s Community Developments Fact Sheet on NMTCs describes how NMTCs can help banks meet their CRA obligations. Both NMTCs and OZ investments are forms of patient capital with NMTC debt investments typically having a term of 7 years and OZ equity investments held for a minimum of 10 years being exempt from any additional gains beyond what was previously deferred. In addition, if the investment is held for longer than 5 years, there is a 10 percent exclusion of the deferred gain and if held for more than 7 years, the 10 percent becomes 15 percent.
While a significant amount of attention is being paid right now to interpreting proposed regulations and other guidance issued by the Treasury Department and IRS on Oct. 19 it is important to take advantage of the OCC’s ANPR on CRA to ensure OZ investments receive favorable consideration under a new CRA regulatory framework as there is no telling the next time the OCC and other federal bank regulators will invite public comment on ways to transform or modernize the regulations that implement the CRA but it will likely not be anytime soon. Comments on the ANPR must be received on or before Nov. 19 so time is of the essence. The Novogradac OZ Working Group will submit comments, but interested parties should also consider doing so.