OCC Bulletin 2021-15| March 25, 2021

Commercial Lending: Tax Equity Finance Transactions Pursuant to 12 CFR 7.1025

To

Chief Executive Officers of All National Banks, Federal Savings Associations, and Federal Branches and Agencies; Department and Division Heads; All Examining Personnel; and Other Interested Parties

Summary

This bulletin provides information to banks1 about written notifications or requests for tax equity finance (TEF) transactions pursuant to 12 CFR 7.1025.

Note for Community Banks

This bulletin applies to community banks that engage in TEF transactions.

Background

On December 22, 2020, the Office of the Comptroller of the Currency (OCC) issued a final rule codifying the authority of banks to engage in TEF transactions under their 12 USC 24(Seventh) (national banks) and 12 USC 1464 (federal savings associations) lending authority, respectively. The final rule is effective April 1, 2021.

A TEF transaction is a transaction in which a bank provides equity financing to fund a project or projects that generate tax credits or other tax benefits and the use of an equity-based structure allows the transfer of those credits and other tax benefits to the bank.2 A bank may engage in a TEF transaction pursuant to 12 USC 24(Seventh) (national banks) and 12 USC 1464 (federal savings associations) only if the transaction is the functional equivalent of a loan3 and the transaction satisfies the conditions of 12 CFR 7.1025(d). The authority to engage in TEF transactions under 12 CFR 7.1025 is separate from, and does not limit, other investment authorities available to banks.4 That is, banks may engage in TEF transactions under other investment authorities, and the requirements and limits of the relevant authority will govern such transactions.5 If a bank is relying on its lending authority to participate in a TEF transaction, the TEF transaction is subject to the substantive legal requirements of a loan, including applicable legal lending limits and affiliate transaction restrictions.6 Additionally, TEF transactions may also be subject to limits other than those in 12 CFR 7.1025.

A TEF transaction is the functional equivalent of a loan if it satisfies all of the following requirements:7

  • The structure of the transaction is necessary for making the tax credits or other tax benefits available to the bank.
  • The transaction is of limited tenure and is not indefinite, including retaining a limited investment interest that is required by law to obtain continuing tax benefits or needed to obtain the expected rate of return.
  • The tax benefits and other payments received by the bank from the transaction repay the investment and provide the expected rate of return at the time of underwriting.
  • Consistent with 12 CFR 7.1025(c)(3), the bank does not rely on appreciation of value in the project or property rights underlying the project for repayment.
  • The bank uses underwriting and credit approval criteria and standards that are substantially equivalent to the underwriting and credit approval criteria and standards used for a traditional commercial loan.
  • The bank is a passive investor in the transaction and is unable to direct the affairs of the project company.
  • The bank appropriately accounts for the transaction initially and on an ongoing basis and has documented contemporaneously its accounting assessment and conclusion.

Although a transaction may be the functional equivalent of a loan for permissibility purposes, it may be treated as an equity investment for accounting or tax purposes.

A bank may engage in a TEF transaction under 12 CFR 7.1025 only if it meets the following five requirements in addition to the transaction being the functional equivalent of a loan:8

  • The bank cannot control the sale of energy, if any, from the project.9
  • The bank limits the total dollar amount of TEF transactions undertaken to no more than 5 percent of its capital and surplus, unless the OCC determines, by written approval of a written request by the bank to exceed the 5 percent limit, that a higher aggregate limit will not pose an unreasonable risk to the bank and that the TEF transactions in the bank’s portfolio will not be conducted in an unsafe or unsound manner. In no case may a bank’s total dollar amount of TEF transactions undertaken pursuant to 12 CFR 7.1025 exceed 15 percent of its capital and surplus. For purposes of these limits, “capital and surplus” uses the definition from 12 CFR 32.2.10
  • The bank has provided written notification to the appropriate OCC supervisory office,11 prior to engaging in each TEF transaction that includes its evaluation of the risks posed by the transaction.
  • The bank can identify, measure, monitor, and control the associated risks of its TEF transaction activities individually and as a whole on an ongoing basis to ensure that such activities are conducted in a safe and sound manner.
  • The bank obtains a legal opinion or has other good faith, reasoned bases for making a determination that tax credits or other tax benefits are available before engaging in a TEF transaction.

Prior Written Notification for TEF Transactions

Banks must provide written notification to the appropriate OCC supervisory office before engaging in each TEF transaction. The notification must include the bank’s evaluation of the risks posed by the transaction.12 Generally, the notification should include

  • a detailed transaction description, including the bank’s evaluation of the risks posed by the transaction. The written notification should include a copy of the bank’s underwriting and approval memorandums.
  • a detailed description of ow the transaction satisfies the requirements set forth in 12 CFR 7.1025, including
    • a description of how the TEF transaction is the functional equivalent of a loan.
    • whether the bank will control the sale of energy, if any, from the project(s) underlying the TEF transaction.
    • whether the TEF transaction is within established limits as a percentage of the bank’s capital and surplus.
    • a discussion of how the bank will identify, measure, monitor, and control the associated risks of its TEF transactions (individually and as whole) on an ongoing basis to ensure such activities are conducted in a safe and sound manner.13
    • whether the bank has obtained a legal opinion or has other good faith, reasoned bases for making a determination that tax credits or other tax benefits are available before engaging in the TEF transaction.
  • certification that the TEF transaction meets all applicable legal requirements.

The OCC will acknowledge receipt of the bank’s request within five calendar days.14

Requests for a Higher Limit on TEF Transactions

The rule limits the total dollar amount of TEF transactions undertaken to no more than 5 percent of a bank’s capital and surplus unless the bank has received OCC approval to exceed the 5 percent limit. In no case may a bank’s total dollar amount of TEF transactions undertaken exceed 15 percent of its capital and surplus.15 The OCC encourages bank management to consult with the bank’s OCC supervisory office before submitting a request to exceed the 5 percent limit.

The bank’s written request for its total dollar amount of TEF transactions to exceed 5 percent of its capital and surplus must be provided to the appropriate OCC supervisory office.16 Generally, the bank’s written request to exceed the 5 percent limit should include

  • dollar amount and percent of capital and surplus representing the increase beyond the 5 percent limit that the bank seeks.
  • a discussion of the bank’s rationale for increasing the limit beyond 5 percent.
  • evidence that a higher aggregate limit will not pose an unreasonable risk to the bank.
  • discussion of the bank’s ability to identify, measure, monitor, and control the associated risks of its TEF transaction activities individually and as a whole on an ongoing basis to ensure that such activities are conducted in a safe and sound manner.17
  • any other information that might be helpful to the OCC in completing its review.

The OCC supervisory office should acknowledge receipt of the bank’s request within five days and send the full response as soon as practicable, but typically within no more than 30 days. If a full response is not possible within 30 calendar days, the supervisory office will provide the bank with an expected resolution date and periodic status updates.18 The OCC may request additional information from the bank to make its decision.
 

Further Information

Please contact Beth Marie O’Laughlin, Risk Specialist for Commercial Credit Policy, at (202) 649-6670, or contact your supervisory office.

 

Grovetta N. Gardineer
Senior Deputy Comptroller for Bank Supervision Policy

Related Link

1 “Banks” refers collectively to national banks, federal savings associations, and federal branches and agencies of foreign banking organizations.

2 “TEF transaction” is defined at 12 CFR  7.1025(b)(3).

3 A TEF transaction is the functional equivalent of a loan if it meets the requirements of 12 CFR 7.1025(c).

4 Refer to 12 CFR 7.1025(a). For example, banks may make investments that are designed primarily to promote the public welfare. Such investments may include TEF transactions made pursuant to these public welfare investment requirements and procedures. Refer to 12 CFR 24 (national banks) and 12 CFR 160.30 and 160.36 (federal savings associations).

5 See, e.g., 12 USC 24(Eleventh), 12 USC 1464(c)(3)(A), 12 CFR 24, 12 CFR 160.30, and 12 CFR 160.36.

6 Refer to 12 CFR 7.1025(e).

7 Refer to 12 CFR 7.1025(c).

8 Refer to 12 CFR 7.1025(d).

9 Refer to OCC Interpretive Letter Nos. 1139 and 1141 for examples of transactions in which the bank does not control the sale of energy.

10 Refer to 12 CFR 7.1025(b)(2), “Capital and Surplus.”

11 Under 12 CFR 7.1025(b)(1), “appropriate OCC supervisory office” means the OCC office that is responsible for the supervision of a bank, as described in subpart A of 12 CFR 4.

12 Refer to 12 CFR 7.1025(d)(3).

13 Similar to how a bank identifies, measures, monitors, and controls risks related to loans and other extensions of credit but does not exercise control over the business of the borrower, a bank would identify, measure, monitor, and control risks related to the transaction but would not be exercising control over the operations of the project or projects underlying the TEF transaction.

14 Acknowledgement of receipt within five days is the OCC’s practice for most written communications, as explained in the “Bank Supervision Process” booklet of the Comptroller’s Handbook

15 Refer to 12 CFR 7.1025(d)(2).

16 Ibid.

17 Similar to how a bank identifies, measures, monitors, and controls risks related to loans and other extensions of credit but does not exercise control over the business of the borrower, a bank would identify, measure, monitor, and control risks related to the transaction but would not be exercising control over the operations of the project or projects underlying the TEF transaction.

18 These procedures are consistent with the OCC’s processes for written communications, as explained in the “Bank Supervision Process” booklet of the Comptroller’s Handbook.