DIVISION OF CONSUMER AND 

COMMUNITY AFFAIRS 

CA 19-1 

February 25, 2019 

TO THE OFFICERS AND MANAGERS IN CHARGE OF CONSUMER 

AFFAIRS SECTIONS AND FINANCIAL INSTITUTIONS SUPERVISED 

BY THE FEDERAL RESERVE: 

Applicability to Community Banking Organizations: This guidance applies to all institutions 

supervised by the Federal Reserve, including those with total consolidated assets of $10 billion 

or less. 

SUBJECT: New Markets Tax Credits and Public Welfare Investments 

The Federal Reserve is issuing this letter to inform financial institutions of a recent 

determination made under the Public Welfare Investment (“PWI”) provision of the Federal 

Reserve Act (“FRA”). 

The Board recently considered the requirements of the Department of Treasury’s New 

Markets Tax Credit (“NMTC”) program and determined that a NMTC-eligible investment, 

directly or indirectly, in an entity that is a “qualified community development entity” as defined 

in section 45D(c)(l) of the Internal Revenue Code is “designed primarily to promote the public 

welfare” within the meaning of section 9(23) of the Federal Reserve Act (“FRA”).

1 

Accordingly, state member banks (“SMBs”) are authorized to make investments qualifying for 

the NMTC Program under section 9(23) of the FRA (12 USC 338a), as long as those investments 

comply with all other applicable statutory and regulatory criteria.2 

1 Letter dated July 2, 2018, from Ann E. Misback, Secretary of the Board, to Wendy Goldberg, Esq., Sullivan and 

Cromwell, LLP. 

2 Prior to this determination, NMTC proposals by SMBs had been approved under delegated authority because they 

otherwise satisfied the public welfare investment criteria of section 22(b)(1) of Regulation H, 12 CFR 208.22(b)(1). 
 

 

 

 

 

Section 9 (23) of the FRA authorizes SMB to make investments "directly or indirectly, each 

of which is designed primarily to promote the public welfare, including the welfare of low- and 

moderate-income communities or families, to the extent permissible under state law.” 

The Board’s Regulation H (12 CFR 208.22) establishes procedures for public welfare 

investments by SMBs. Under Regulation H, investments meeting certain criteria, including 

investments that the Board has determined are designed to primarily promote the public welfare, 

may be eligible for post notice procedures.3 Investment proposals that do not fall within the 

scope of investments listed in Regulation H or that raise significant legal, policy, or supervisory 

issues must receive the Board’s specific consent. 

Established in 2000, the NMTC Program4 authorizes institutions or individuals to receive 

federal income tax credits for making equity investments in specialized financial institutions 

known as Community Development Entities5 (“CDEs”). The Treasury Department's Community 

Development Financial Institutions Fund6 (“CDFI Fund”) certifies and awards NMTC 

allocations7

 to qualified CDEs, the primary mission of which must be to serve or provide 

investment capital for Low Income Communities8 (“LICs”). Generally, entities that make an 

equity investment in a qualified CDE are eligible to receive NMTCs if the qualified CDE uses 

3 An SMB that qualifies for the post notice procedures is required to submit to the Reserve Bank a notice of the 

investment not more than 30 calendar days after making the investment. 

4 The NMTC Program was established as part of the Community Renewal Tax Relief Act of 2000. The goal of the 

program is to spur revitalization efforts of low-income and impoverished communities across the United States and 

Territories. See https://www.cdfifund.gov/programs-training/Programs/new-markets-tax-credit/Pages/default.aspx. 

5 A CDE is a domestic corporation or partnership that is an intermediary vehicle for the provision of loans, 

investments, or financial counseling in low-income communities. NMTC Program applicants must be certified 

CDEs by the CDFI Fund to receive an NMTC allocation. To become certified as a CDE, an organization must 

submit a CDE Certification Application to the CDFI Fund for review. The application must demonstrate that the 

applicant meets each of the following requirements to become certified: be a legal entity at the time of application; 

have a primary mission of serving LICs; and maintain accountability to the residents of is targeted LICs. See 

https://www.cdfifund.gov/programs-training/certification/cde/Pages/default.aspx 

6 The CDFI Fund was established through the Riegle Community Development and Regulatory Improvement Act of 

1994. The goal of the Fund is to promote economic revitalization in distressed communities throughout the United 

States by providing financial assistance and information to community development financial institutions 

(“CDFIs”). CDFIs are financial institutions that provide credit and financial services to underserved markets and 

populations. 

7 The CDFI Fund has been authorized to administer the NMTC program. CDEs apply to the CDFI Fund each year 

not for tax credits directly, but for an award of allocation authority to raise a certain amount of capital, or Qualified 

Equity Investments from investors. 

8 LICs are defined as any population census tract if (A) the poverty rate for such tract is at least 20 percent, or (B) (i) 

in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 

80 percent of statewide median family income, or (ii) in the case of a tract located within a metropolitan area, the 

median family income for such tract does not exceed 80 percent of the greater of statewide median family income or 

the metropolitan area median family income. 26 USC § 45D(e)(1) 
 

 

substantially all of the cash it receives to invest in businesses located in or serving LICs9. 

Reserve Banks are asked to distribute this letter to supervised institutions in their districts, 

appropriate supervisory staff, staff engaged in community affairs and outreach, and community 

development stakeholders in their districts. If you have any questions, please contact Alison 

Thro, Assistant General Counsel, at (202) 452-3236, David Alexander, Counsel, at (202) 452– 

2877, or Marysol McGee, Senior Community Development Analyst, at (202) 452-3131. In 

addition, questions regarding this letter may be sent via the Board’s public website.10 

Sincerely, 

Suzanne Killian 

Senior Associate Director 

9 Treasury Regulation § 1.45D-1(c)(5)(i) defines substantially all to mean at least 85 percent and provides two 

alternative methods for meeting the substantially-all requirement. The substantially all requirement must be 

satisfied for each annual period in the 7-year credit period. For the first annual period, the requirement is considered 

met if the calculation is performed on a single testing date and the result is at least 85%. For all subsequent annual 

periods, the substantially-all requirement is considered met if the calculation is performed every six months and the 

average of the two computations for the annual period is at least 85%. In the seventh year of the 7-year credit 

period, 85% is reduced to 75%. 

10 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.