Commercial banks and other financial institutions (“lender” or “lenders”) have historically provided financing to government entities and non-profit organizations on a tax-exempt basis through loans and direct purchases of securities municipal. The purchase of municipal securities by the direct lender is generally referred to as a direct purchase or direct placement. Because bank loans to government entities and non-profit borrowers are generally private transactions not subject to the same reporting requirements applicable to municipal securities, there is less historical and empirical data to track volume. However, the loan reports provided by major banks to the Federal Reserve reflecting the amount of bank loans to municipalities are significant. Direct purchases and bank holdings of municipal securities are tracked, and prior to the Tax Reform Act of 1986, lenders held almost 40% of outstanding municipal issues of tax-exempt debt. After the Tax Reform Act of 1986 and before the financial crisis of 2008, lenders shifted much of their participation to the tax-exempt market through products that provided credit enhancement and liquidity. After the 2008 financial crisis, due to multiple factors, the tax exemption market again saw an increase in bank lending and direct purchases of municipal securities by lenders.
The purpose of this booklet is to provide a roadmap for lenders considering lending on a tax-exempt basis and for government entities and non-profit organizations considering incurring tax-exempt debt through bank loan or direct investment. Each occurrence or issuance of tax-exempt debt should be reviewed by a qualified bond adviser such as the Orrick Public Finance Group listed on the inside back cover of this booklet.
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