OCC bulletin outlines requirements for tax equity finance transactions

Details on what is a tax equity finance (TEF) transaction and the regulatory requirements affecting banks engaged in one are outlined in a bulletin issued Thursday by the Office of the Comptroller of the Currency (OCC).

The authority for a national bank or federal savings association to engage in TEF transactions was codified in a final rule issued last December. The OCC defines a TEF transaction as one 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. The OCC said a bank may engage in a TEF transaction only if the transaction is the functional equivalent of a loan and it satisfies the conditions of 12 CFR 7.1025(d).

The agency notes that 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. “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,” the bulletin states. “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.” Other limits may apply as well.

The OCC, in Thursday’s bulletin, stated that a TEF transaction is the functional equivalent of a loan if it satisfies all of the following requirements:

  • 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.

The OCC noted that 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. Other requirements, in addition to being the functional equivalent of a loan, state that the bank cannot control the sale of energy, if any, from the project; must limit the total dollar amount of TEF transactions undertaken to no more than 5% of its capital and surplus without OCC approval and in no case more than 15% of its capital and surplus; must provide written notification to its OCC supervisory office; can  identify, measure, monitor, and control the associated risks; and 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.”

OCC Bulletin 2021-15