Volume 9; No. 4; Fall 1997
Interagency Interpretive Letter Clarifies How Investments in National
Funds Are Treated Under the Investment Test
By Shawn Elliott Marshall, Associate Editor, Community Investments
Responding to concerns raised by the Local Initiatives Support Corporation
(LISC) and its subsidiary, National Equity Fund (NEF), the OCC issued
an interagency interpretive letter on September 11, 1997 which clarifies
how investments in national funds, which are then invested in low-income
housing tax credit transactions, will be treated under CRA's investment
test. The letter addressed three major areas of concern and responded
to each as follows:
1. Direct vs. Indirect Investments: The agencies clarified
that the CRA regulations do not differentiate between direct investments
in specific projects vs. indirect investments made through regional or
national funds as long as the investments meet the definition of
qualified community development investments. Both are considered
2. Geographic Distribution: At the time limited partnerships
are formed through national funds such as NEF, financial institutions
are obliged to invest in "blind pools," since actual projects
receiving committed funds haven't yet been identified. Given CRA's focus
on an institution's assessment area, there was concern that tax credit
investments made through a national fund (such as NEF) would not receive
the same level of consideration as investments in local or regional funds.
However, NEF has reported that financial institutions can geographically
target their investment(s) to areas that correlate with their assessment
area or a broader statewide/regional area. "NEF will provide investors
a written statement that it intends to invest a specified dollar amount
in a geographical region specified by the investor and based on the NEF
regional structure. These targeting assurances from the NEF allow a retail
institution to meet its geographic investment needs with an investment
Furthermore, for limited purpose or wholsesale banks, qualified investments
in a statewide or regional area which includes its assessment area will
be favorably considered in the evaluation of an institution's CRA performance.
If the wholesale/limited purpose bank has adequately addressed the needs
of its assessment area(s), it may invest in a nationwide fund without
targeting its funds.
3. How Examiners Evaluate Investments in Equity Funds: A financial
institution may receive CRA consideration for its equity investment in
low-income housing tax credits at the time it makes a binding investment
commitment to the partnership; there is no need to wait until funds
have been dispersed to specific projects.Once the partnership is formed,
each investor records the promissory note on its books and amortizes the
investment over the life of the tax credit benefit period. In each subsequent
year after the initial investment, the CRA consideration that an institution
would receive for the dollar amount outstanding would reflect the investor's
accounting treatment in that year. Thus, examiners will consider both
new and outstanding investments in their investment test determinations.
| "The interpretive letter provides a needed comfort level
for financial institutions considering investing in national funds.
These funds have proven to be excellent tools for increasing investment
in low-income housing."
-Ellen Lazar, Executive Director, National Association of Affordable
For a complete understanding of the issues, CRA and investment officers
are encouraged to read the full text of the interagency interpretive letter.
For a copy, please contact June Yambao in Community Affairs at (415) 974-2978.