Federal banking regulator blesses renewable energy tax equity in CRA updates
In a move designed to increase project finance of projects located in America’s low- and moderate-income (LMI) areas, the nation’s top federal banking regulator, the Office of the Comptroller of the Currency (OCC), recently issued regulations encouraging banks to finance clean energy projects. The move is part of the OCC’s effort to modernize the administration and regulation of the Community Reinvestment Act, popularly known as the CRA.
The CRA was first enacted to ensure that certain federally regulated financial institutions serve LMI individuals and geographic areas by requiring those institutions to provide capital and other banking access to more than just the wealthier areas of the nation. The CRA was therefore designed as a policy tool to prevent the historically discriminatory practice of “redlining,” or the process of institutionalizing racial or economic discrimination by financial institutions.
As principal regulator of the CRA, in conjunction with the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC), the OCC has, for a number of years, made an effort to recognize the role of renewable energy in serving LMI communities. Thus, it was not surprising that the OCC approved the recent final regulations.
However, what did come as a pleasant surprise to the renewable energy sector was the depth and breadth of the OCC’s expressed encouragement of clean energy investment.
The final regulations, which become effective April 2021, provide banks and financial institutions with clear examples of the kind of clean energy projects that could qualify for CRA compliance. In addition, the guidance now removes regulatory uncertainty on the role of tax equity as a form of capital finance. The OCC thus clarified and elevated concepts from earlier interpretive guidance. It also provided detailed comments on tax accounting technical nuances, comments designed to provide a high level of comfort to institutional regulators and compliance officers who are more familiar with the better-known forms of institutional tax equity, namely the Low-Income Housing Tax Credit (LIHTC), the Historic Tax Credit (HTC), and the New Markets Tax Credit (NMTC). So, the new guidance is intended to help those familiar with these existing tax equity financing programs now expand into clean energy finance.
In addition to focusing on clean energy, the OCC guidance also re-defines, broadens, and modernizes the geographical footprint for eligible investments. In the advent of internet banking and other electronic financial services, the old CRA rules are now expanded to reflect modern banking realities. The old rules often limited a regulated institution’s investments to that institution’s corporate headquarters’ physical location and often limited the measure of economic impact to full-time job creation. Now, these constraints are loosened, and both the reach and metrics for measuring LMI impact are now broader and more flexible. It appears that the policy goal of positively impacting the lives of people in LMI areas is now more likely than ever to be realized with these more realistic standards, which also better fit the way in which renewable energy is able to benefit LMI individuals and economies.
Because the CRA has been proved to boost investment interest in tax equity financing in the LIHTC, HTC, and NMTC sectors, we would expect that once these changes have been fully absorbed by the regulated institutions, there will be expanded activity in clean energy tax equity financings. This is because the regulatory benefit of CRA compliance to a regulated institution has been shown to increase the amount of tax equity raised by project developers. This increase in equity can lower the amount of necessary debt and other sources of capital in the typical tax equity deal, and that alone, the attraction of more capital to the sector, should bode well for America’s clean energy sector.
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