A Department of Justice probe into low-income housing tax credits has ensnared two of the nation's largest banks, but the investigation might do little to dampen bank enthusiasm for the product.
Wells Fargo & Co. and PNC Financial Services Group Inc. have disclosed that they are both the subject of Justice Department inquiries. Bloomberg reported in June that Wells Fargo was in the process of negotiating a settlement and was seeking to resolve the issue prior to naming a new CEO.
Federal prosecutors suspect the banks might have colluded with real estate developers in the bidding for the credits, according to the media reports.
State agencies allocate the tax credits to developers with affordable housing projects in a competitive process. The developers then sell those tax credits to banks or other investors, who use the credits to lower their tax bills. Investors can often purchase the tax credits for less than 100% of the value, meaning the tax savings are greater than the cost of buying the credits. The developers then use the proceeds from the tax credit sale toward the affordable housing project.
The public reporting suggests banks would purchase the tax credits at below-market rates with the promise to provide the developer other benefits, such as attractive financing.
"If you see a bank is consistently paying below the market rate for tax credits, that should be a red flag," said Ray Jones, a partner with Parker Poe who has worked on affordable housing financing. "The probe appears to allege there were inducements where the banks would make loans to make up the difference."
While Bloomberg's reporting suggests that Wells Fargo is seeking a near-term resolution, the broader investigation into low-income housing tax credits could stretch for some time, said Stanley Foodman, CEO of Foodman CPAs & Advisors.
"The average federal tax investigation takes two years. They're going to interview hundreds of people, and it looks like it got started in 2018, so it could go into next year," he said in an interview.
Despite the active Justice Department investigation, there appears to be little effect on tax credit demand, Jones said. Since the low-income tax credit market is national in scope, there is sufficient volume to track pricing to see if interest in the program has waned, he said.
Novogradac & Co., an accounting and consulting firm that specializes in affordable housing, tracks the pricing of low-income housing tax credits. The firm's most recent data shows pricing at 92 cents on the dollar in March, relatively flat from the previous year, suggesting the probe has had little effect on demand.
Rather, the most significant blip in tax credit pricing came soon after President Donald Trump's election as the prospect of corporate tax reform put in doubt the level of tax liability among banks and other buyers of tax credits. Lower tax bills mean banks have less reason to buy tax credits that offset their liability. Now that the tax reform has been processed and bank profits remain robust, demand for the tax credits has rebounded.
"Any time you have credits, and corporations are making profits, there's a strong market for tax credits," Jones said. "I think the market is pretty good right now."