A Positive Step: Regulators Propose Clarification That Renewable Energy Component in LIHTC Projects Should Receive CRA Consideration

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On September 8, 2014, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) proposed clarifying existing federal regulations to clearly encourage the use of “green” energy in low-income housing tax credit (LIHTC) projects.

This significant new development was among the proposed clarifications and revisions to the financial regulators’ Interagency Questions and Answers Regarding Community Reinvestment. These Questions and Answers are intended to provide further guidance to agency personnel, financial institutions, and the public on the regulations that implement the Community Reinvestment Act (CRA).

The regulators have solicited public comments by November 10 on the proposed clarifications and revisions. (The proposed changes can be viewed at http://tinyurl.com/pjrb5g3)

The agencies first issued the Questions and Answers in 1996 and last published them in their entirety in 2010. In 2013, they proposed revisions and solicited feedback, and on September 8 released the current new set in which they discussed some of the comments and proposed revisions that were received.

Renewable Energy: Proposed Questions and Answers

According to the regulators, a number of commenters said that the agencies should address whether alternative energy facilities and energy efficiency enhancements that are responsive to local needs are eligible for CRA consideration. The regulators also stated that bankers commented that federal examiners do not always give consideration for projects or initiatives that incorporate “green” components because the concept is not specifically addressed in either the CRA regulations or the Questions and Answers.

The agencies indicated that they have learned of examples in which financial institutions were not given CRA consideration for energy-efficiency initiatives they helped to finance that were related to the rehabilitation or development of affordable housing projects. In addition, the agencies said that some bankers have commented that having specific examples in the CRA guidance helps to create incentives within their financial institutions to pursue such projects.

While the regulators so far have supported LIHTC projects that use solar energy as being eligible for CRA consideration, this backing has not been clearly spelled out for regulated institutions in the agencies’ CRA regulations. As a result, both solar and LIHTC developers have often failed to attract the interest of lenders and/or investors in housing credit projects using green energy, simply for lack of “official” regulatory clarity.

The new proposed clarification states that the financial regulatory agencies concur that loans enabling energy initiatives that help reduce the cost of operating or maintaining affordable housing, even if the benefit to residents is indirect, do qualify for consideration as community development loans under CRA.

Proposed New Example

To implement this clarification, the agencies have proposed incorporating a new example of a community development loan that illustrates how a loan that finances renewable energy or energy-efficient technologies and also has a community development component may be considered in a financial institution’s performance evaluation.

Following is the text of the proposed revision:

§ __.12(h) – 1: What are examples of community development loans? A1. Examples of community development loans include, but are not limited to, loans to: … • Borrowers to finance renewable energy or energy-efficient equipment or projects that support the development, rehabilitation, improvement, or maintenance of affordable housing or community facilities, such as a health clinic, even if the benefit to low- or moderate-income individuals from reduced cost of operations is indirect, such as reduced cost of providing electricity to common areas of an affordable housing development.

A Positive Step

We see this as a very positive step forward for the nation and true leadership on the part of U.S. financial regulators in the combined areas of affordable housing and renewable energy and energy efficiency. By establishing new, well-defined regulatory language and acknowledging a clear appreciation of the many material benefits of renewable energy and energy efficiency for communities across the nation, greater investment in renewable energy should result which can only help the LIHTC industry. We should all actively encourage this expression of support by the agencies because this clarity will promote further investment in LIHTC, as well as renewable energy, economic growth, new jobs, greater energy independence and cost savings for Americans, particularly those of low to moderate income. Readers who currently benefit from CRA rules, and especially those who don’t but wish to, should take the time to file even a brief official comment in support of the proposed change with the regulators.

Lee J. Peterson is a Senior Manager at CohnReznick LLP in its Atlanta, Ga. office. He is also a member of the Editorial Advisory Board of Tax Credit Advisor. He may be reached at 404-847-7744, Lee.Peterson@CohnReznick.com.