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New Treasury rules create opportunity to advance local innovation economies

September 06, 2018
By: Jason Rittenberg

Organizations that assist and finance innovation and high-growth entrepreneurship have largely been left out of one of America’s great drivers of local investment: Community Reinvestment Act (CRA) activities by banks. Now, with the U.S. Department of Treasury actively seeking to modernize CRA regulations, the tech-based economic development community has an opportunity to help CRA to become a tool for advancing local innovation economies. All parties are encouraged to read below for more information and to submit comments by Nov. 19. SSTI members interested in discussing the notice, including the option of submitting combined or coordinated comments, should contact Jason Rittenberg (rittenberg@ssti.org | 614.901.1690) to get engaged.

The Office of the Comptroller of the Currency (OCC), a division of the Treasury, announced an intent to publish new CRA regulations. These new rules will be intended to bring additional clarity and transparency to CRA evaluations and to better fit banks with different business strategies. Further, the OCC asks for comments about expanding CRA-qualifying activities and changing the definition of community and economic development.

The comment period generally, and these items specifically, provide an opportunity for the tech-based economic development community to encourage the Treasury to better account for critically important science, tech and innovation activities in CRA evaluations. Venture capital investments, while eligible for CRA consideration, have typically received scant attention from banks in this regard. This lack of attention has largely prevented even the venture development organizations with significant focus on low-moderate income regions from accessing the financial resources available to neighboring, debt-providing development organizations.

Changes that could help CRA become a better tool for supporting TBED activities include:

  • Giving investments weights comparable — if not preferable — to loans;
  • Allowing banks to receive a share of consideration for follow-on investments into funds or startups capitalized by the bank; and,
  • Defining the launch of high-growth businesses as a favorably weighted part of the CRA definition of economic development.

CRA is a 1977 law intended to encourage banks to lend capital within their communities, with an emphasis on low-moderate income neighborhoods. Banks are rated on their performance and scored on a four-point scale from “outstanding” to “substantial noncompliance.” Within the lending and investment categories of evaluation, banks need to demonstrate loans to businesses and farms, complex or innovative financial structures and responsiveness to community development needs.

In part because of other lending regulations and shareholder interests, many banks have found working with third party community development lenders to be a preferred model for strengthening their CRA compliance. While such partnerships can take many forms — including with community development subsidiaries — Treasury-certified Community Development Financial Institutions (CDFIs) tend to be common, well-known partners for banks. CDFI certification requirements virtually guarantee that their activities are CRA-eligible. With 306 CDFIs providing nearly 43,000 business loans in 2015 alone (and more than 600,000 total loans that year overall), banks working with CDFIs, or certifying their own, can see substantial benefits for their CRA evaluations.

New Markets Tax Credits (NMTC) investments, which are coordinated through entities also approved by Treasury’s CDFI Fund, are another popular vehicle for CRA investment. Through 2015, the Treasury has allocated $50.5 billion for the credits, which has thus far been invested in more than 4,000 projects. Despite the program’s reputation for intensive real estate activity ($12.2 billion), the CDFI Fund reports that the majority of projects have not been into real estate, with emphases on health care provision ($7.8 billion), manufacturing ($4.7 billion) and educational services ($4.0 billion). Although tax credits are commonly a vehicle for providing equity for a project, many NMTC projects are structured so that a bank provides a “leverage loan” as part of the financial structure (and some banks receive their own NMTC authorities directly).

The mass availability of these options, and the corresponding familiarity that banks have with the vehicles, seems likely to be a major reason why relatively few banks invest in community development-related venture capital, which is eligible for CRA. New CRA regulations advanced by Treasury present an opportunity to encourage banks to incorporate more innovation-oriented economic opportunities for target populations and regions into their CRA strategies.

cdfi, federal agency, economic development