[Federal Register Volume 84, Number 240 (Friday, December 13, 2019)]
[Rules and Regulations]
[Pages 68019-68034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26544]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
========================================================================
Federal Register / Vol. 84, No. 240 / Friday, December 13, 2019 /
Rules and Regulations
[[Page 68019]]
DEPARTMENT OF TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID OCC-2018-0026]
RIN 1557-AE48
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Regulation Q; Docket No. R-1621]
RIN 7100-AF15
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AE90
Regulatory Capital Treatment for High Volatility Commercial Real
Estate (HVCRE) Exposures
AGENCY: Office of the Comptroller of the Currency, Treasury; the Board
of Governors of the Federal Reserve System; and the Federal Deposit
Insurance Corporation.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation (collectively, the agencies) are adopting a final
rule to revise the definition of ``high volatility commercial real
estate (HVCRE) exposure'' in the regulatory capital rule. This final
rule conforms this definition to the statutory definition of ``high
volatility commercial real estate acquisition, development, or
construction (HVCRE ADC) loan,'' in accordance with section 214 of the
Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA). The final rule also clarifies the capital treatment for
loans that finance the development of land under the revised HVCRE
exposure definition.
DATES: The final rule is effective on April 1, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: Mark Ginsberg, Senior Risk Expert, or Benjamin Pegg, Risk
Expert, Capital and Regulatory Policy, (202) 649-6370; or Carl
Kaminski, Special Counsel, or Rima Kundnani, Attorney, Chief Counsel's
Office, (202) 649-5490, for persons who are deaf or hearing impaired,
TTY, (202) 649-5597, Office of the Comptroller of the Currency, 400 7th
Street SW, Washington, DC 20219.
Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Juan Climent, Manager, (202) 872-7526; Andrew Willis, Lead
Financial Institutions Policy Analyst, (202) 912-4323; Matthew
McQueeney, Senior Financial Institutions Policy Analyst, (202) 452-
2942; Michael Ofori-Kuragu, Senior Financial Institutions Policy
Analyst, (202) 475-6623, or Benjamin McDonough, Assistant General
Counsel, (202) 452-2036; David Alexander, Senior Counsel, (202) 452-
2877, Legal Division, Board of Governors of the Federal Reserve System,
20th and C Streets NW, Washington, DC 20551. For the hearing impaired
only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: Benedetto Bosco, Chief, Capital Policy Section;
[email protected]; David Riley, Senior Policy Analyst, Capital Policy
Section; [email protected]; Michael Maloney, Senior Policy Analyst,
[email protected]; [email protected]; Capital Markets Branch,
Division of Risk Management Supervision, (202) 898-6888; Beverlea S.
Gardner, Senior Examination Specialist, [email protected], Policy and
Program Development; Michael Phillips, Counsel, [email protected],
Supervision and Legislation Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Summary of the Proposals, Comments Received, and the Final Rule
A. Evaluation of ADC Loans Originated After January 1, 2015
B. Revised Scope of HVCRE Exposure Definition
C. Exclusions From the Revised HVCRE Exposure Definition
1. One- to Four-Family Residential Properties
a. Land Development
2. Community Development
3. Agricultural Land
4. Loans on Existing Income Producing Properties That Qualify as
Permanent Financings
5. Certain Commercial Real Property Projects
a. Contributed Capital
b. ``As Completed'' Value Appraisal
c. Project
6. Reclassification as a Non-HVCRE Exposure
7. Related Interagency Guidance
III. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act Analysis
C. Plain Language
D. OCC Unfunded Mandates Reform Act of 1995 Determination
E. Riegle Community Development and Regulatory Improvement Act
of 1994
F. The Congressional Review Act
I. Background
On May 24, 2018, the Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCPA) became law. Section 214 of EGRRCPA
(section 214 of EGRRCPA) \1\ added a new section, Section 51, to the
Federal Deposit Insurance Act (FDI Act).\2\ Section 51 of the FDI Act
provides a statutory definition of high volatility commercial real
estate acquisition, development, or construction (HVCRE ADC) loan.
Under section 51 of the FDI Act, the agencies may only require a
depository institution to assign a heightened risk weight to a high
volatility commercial real estate (HVCRE) exposure, as defined under
the capital rule, if such exposure is an HVCRE ADC loan. Section 214
was effective upon enactment of EGRRCPA in May 2018.
---------------------------------------------------------------------------
\1\ Public Law 115-174, 132 Stat. 1296 (2018).
\2\ See 12 U.S.C. 1831bb.
---------------------------------------------------------------------------
The Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies)
issued an interagency statement on July 6, 2018 (interagency statement)
that provided information on rules and associated reporting
requirements that the agencies jointly administer and that EGRRCPA
immediately affected, including the
[[Page 68020]]
HVCRE exposure definition in the capital rule (as affected by section
214 of EGRRCPA).\3\ With respect to section 214 of EGRRCPA, the
interagency statement provided that banking organizations could use
available information to reasonably estimate and report only HVCRE ADC
loans (as set forth in section 214 of EGRRCPA) for the purpose of
reporting HVCRE exposures on Schedule RC-R, Part II of the Consolidated
Reports of Condition and Income (Call Report) \4\ and Schedule HC-R,
Part II of FR Y-9C. The interagency statement further provided that
banking organizations would be permitted to refine their estimates as
they obtain additional information. The interagency statement also
indicated that, alternatively, banking organizations would be permitted
to continue to report and risk-weight HVCRE exposures in a manner
consistent with the current capital rule and instructions to the Call
Report or FR Y-9C until the agencies took further action.
---------------------------------------------------------------------------
\3\ Board, FDIC, and OCC, Interagency statement regarding the
impact of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180706a1.pdf.
\4\ OMB Control Nos.: OCC, 1557-0081; Board, 7100-0036; and
FDIC, 3064-0052.
---------------------------------------------------------------------------
On September 28, 2018, the agencies published an HVCRE notice of
proposed rulemaking (HVCRE proposal) in the Federal Register to revise
the HVCRE exposure definition in section 2 of the capital rule to
conform to the statutory definition of an HVCRE ADC loan.\5\ As part of
the HVCRE proposal, to facilitate its consistent application, the
agencies proposed to interpret certain terms in the revised definition
of HVCRE exposure generally consistent with their usage in other
relevant regulations or the instructions to the Call Report, where
applicable, and requested comment on whether any other terms in the
revised definition would also require interpretation. On July 23, 2019,
the agencies proposed to clarify a portion of the HVCRE proposal by
publishing in the Federal Register a subsequent proposal (Land
Development proposal) that would have added a new paragraph to the
proposed definition of HVCRE exposure.\6\ The new paragraph would have
provided that the exclusion for one- to four-family residential
properties from the definition of HVCRE exposure does not include
credit facilities that solely finance land development activities, such
as the laying of sewers, water pipes, and similar improvements to land,
without any construction of one- to four-family residential structures.
---------------------------------------------------------------------------
\5\ See 83 FR 48990 (September 28, 2018). Section 214 of EGRRCPA
generally defines an HVCRE ADC loan as a credit facility secured by
land or improved real property that, primarily finances, has
financed, or refinances the acquisition, development, or
construction of real property; has the purpose of providing
financing to acquire, develop, or improve such real property into
income-producing real property; and is dependent upon future income
or sales proceeds from, or refinancing of, such real property for
the repayment of such credit facility. Additionally, in light of
section 214 of EGRRCPA, in the HVCRE proposal the agencies stated
that they will take no further action regarding the HVADC aspect of
the October 27, 2017 proposal titled, Simplifications to the Capital
Rule Pursuant to the Economic Growth and Regulatory Paperwork
Reduction Act of 1996. 82 FR 49984 (October 27, 2017).
\6\ See 84 FR 35344 (July 23, 2019).
---------------------------------------------------------------------------
In the HVCRE proposal, the agencies proposed to revise the
definition of an HVCRE exposure for the purpose of calculating risk-
weighted assets under both the standardized approach and the internal
ratings-based approach (advanced approaches).\7\ The proposal would
have applied a 150 percent risk weight to loans that meet the revised
definition of HVCRE exposure under the capital rule's standardized
approach.\8\ A banking organization that calculates its risk-weighted
assets under the advanced approaches would have referred to the
definition of an HVCRE exposure in section 2 of the capital rule for
the purpose of identifying wholesale exposure categories.\9\
---------------------------------------------------------------------------
\7\ See 12 CFR part 217, subparts D and E (Board); 12 CFR part
3, subparts D and E (OCC); 12 CFR part 324, subparts D and E (FDIC).
\8\ See 12 CFR 217.32(j) (Board); 12 CFR 3.32(j) (OCC); 12 CFR
324.32(j) (FDIC).
\9\ See 12 CFR 217.131 (Board); 12 CFR 3.131 (OCC); 12 CFR
324.131 (FDIC).
---------------------------------------------------------------------------
Consistent with section 214 of EGRRCPA, in the HVCRE proposal, the
agencies proposed to exclude from the revised HVCRE exposure definition
any loan made prior to January 1, 2015.\10\ Unless a lower risk weight
would have applied, banking organizations would have been permitted to
apply a 100 percent risk weight to acquisition, development, or
construction (ADC) loans originated prior to January 1, 2015, even if
those loans were classified as HVCRE exposures under the superseded
HVCRE exposure definition.\11\
---------------------------------------------------------------------------
\10\ On January 1, 2015, the heightened risk weight for HVCRE
exposures became effective for all banking organizations.
\11\ The agencies did not propose to amend the treatment of past
due exposures. Therefore, even if an exposure would no longer be
considered an HVCRE exposure, it still could be subject to a
heightened risk weight if it is 90 days or more past due or reported
as nonaccrual.
---------------------------------------------------------------------------
As discussed further below, the agencies are adopting a final
definition of HVCRE exposure with modifications based on comments
received on the HVCRE and Land Development proposals. In adopting a
final rule (final rule), the agencies made minor modifications to the
proposed regulatory text by removing the separate paragraph describing
the land development loans that qualify for the one- to four-family
residential properties exclusion and including that same language in
the part of the revised HVCRE exposure definition that allows for the
exclusion of one- to four-family residential properties. By its terms,
the statutory definition of an HVCRE ADC loan applies only to
depository institutions. As stated in the HVCRE proposal, applying
separate definitions of HVCRE ADC loan at the depository institution
level and at the holding company level within an organization could
result in undue burden without contributing meaningfully to any
regulatory objective. Accordingly, the final rule applies the revised
definition of an HVCRE exposure to all banking organizations that are
subject to the agencies' capital rule, including bank holding
companies, savings and loan holding companies, and U.S. intermediate
holding companies of foreign banking organizations. Additionally, to
facilitate the consistent application of the revised HVCRE exposure
definition, the agencies are also clarifying the interpretation of
certain terms in the revised HVCRE exposure definition generally to be
consistent with their usage in other relevant regulations or the
instructions to the Call Report and FR Y-9C, where applicable. The
agencies plan to make conforming changes to the instructions of
applicable regulatory reports (Schedule RC-R, Part II of the Call
Report and Schedule HC-R, Part II of the FR Y-9C).\12\
---------------------------------------------------------------------------
\12\ See 84 FR 4131 (February 14, 2019).
---------------------------------------------------------------------------
The effective date of the final rule is April 1, 2020. Prior to the
effective date of the final rule, banking organizations should refer to
the interagency statement. On and after April 1, 2020, the final rule
will supersede the HVCRE exposure section of the interagency statement,
as well as the set of Frequently Asked Questions (FAQs) issued by the
agencies pertaining to HVCRE exposures.\13\ Accordingly, starting April
1, 2020, banking
[[Page 68021]]
organizations subject to the capital rule must evaluate ADC credit
facilities in accordance with the revised definition of HVCRE exposure
in this final rule.
---------------------------------------------------------------------------
\13\ ``Frequently Asked Questions on the Regulatory Capital
Rule,'' OCC Bulletin 2015-23 (April 6, 2016), available at: https://www.occ.gov/news-issuances/bulletins/2015/bulletin-2015-23.html.
``SR 15-6: Interagency Frequently Asked Questions (FAQs) on the
Regulatory Capital Rules'' (April 5, 2015), available at: https://www.federalreserve.gov/supervisionreg/srletters/sr1506.htm; FDIC FIL
16-2015, available at https://www.fdic.gov/news/news/financial/2015/fil15016.html.
---------------------------------------------------------------------------
II. Summary of the Proposals, Comments Received, and the Final Rule
In response to the HVCRE proposal, the agencies received 54 comment
letters, and, in response to the Land Development proposal, the
agencies received 9 comment letters. Numerous commenters supported
revising the definition of HVCRE exposure in accordance with section
214 of EGRRCPA, though commenters were less supportive of the Land
Development proposal. Many commenters offered suggestions on how the
agencies should interpret several of the terms used in section 214 of
EGRRCPA and in the revised definition of HVCRE exposure. Several
commenters observed that the revised HVCRE exposure definition would be
narrower than the previous regulatory definition of HVCRE exposure,
and, that the revised definition would apply only to a relatively small
number of exposures. These commenters suggested that the agencies
should therefore remove the distinction between HVCRE and other ADC
exposures under the capital rule's standardized approach and apply a
flat 100 percent risk weight to all ADC loans. One commenter
recommended eliminating the distinction between HVCRE and other ADC
exposures only for banking organizations with less than $50 billion in
total assets. One commenter, by contrast, opposed the proposal and
indicated that it could lead to increased risk taking by banking
organizations.
ADC loans, which are a subset of all commercial real estate
exposures, generally exhibit heightened risks relative to other
commercial real estate exposures. The revised HVCRE exposure definition
is intended to capture those ADC exposures that have increased risk
characteristics. These risks apply regardless of the size of the
institution that has the exposure, and, therefore, the final rule
applies the same HVCRE exposure definition to all banking organizations
subject to risk-based capital requirements. The agencies have decided
to maintain, as proposed, the 150 percent risk weight under the
standardized approach for any loan that meets the revised definition of
an HVCRE exposure. A banking organization that calculates its risk-
weighted assets under the advanced approaches also would refer to the
definition of an HVCRE exposure in section 2 of the capital rule for
the purpose of identifying the appropriate wholesale exposure category
for its ADC exposures.\14\
---------------------------------------------------------------------------
\14\ See 12 CFR 217.131 (Board); 12 CFR 3.131 (OCC); 12 CFR
324.131 (FDIC).
---------------------------------------------------------------------------
A. Evaluation of ADC Loans Originated After January 1, 2015
In the HVCRE proposal, the agencies invited comment on whether
banking organizations should be required to reevaluate all ADC loans
originated on or after January 1, 2015, under the revised HVCRE
exposure definition. Several commenters stated that the agencies should
clarify how a banking organization would apply the new definition to
ADC loans originated after January 1, 2015, but before the effective
date of the final rule. These commenters stated that banking
organizations should be allowed, but not required, to reevaluate
existing loans to determine whether they are HVCRE exposures under the
revised definition.
In response to the comments, the final rule amends the HVCRE
exposure definition to provide banking organizations with the option to
maintain their current capital treatment for ADC loans originated
between January 1, 2015, and the effective date of this final rule.
Consistent with the interagency statement, a banking organization also
will have the option to reevaluate any or all of its ADC loans
originated on or after January 1, 2015, but before the effective date
of the final rule, using the revised HVCRE exposure definition. Loans
originated after the effective date of this final rule must be risk-
weighted using the revised HVCRE exposure definition. If a loan is an
HVCRE exposure, the loan will remain an HVCRE exposure until
reclassified by the banking organization as a non-HVCRE exposure.
Therefore, with respect to ADC loans originated between January 1,
2015, and prior to the effective date of the final rule that have been
classified as non-HVCRE exposures, the agencies are not requiring
banking organizations to reevaluate those exposures using the revised
HVCRE exposure definition. In the case of a banking organization that
modifies a loan or when the project is altered in a manner that
materially changes the underwriting of the credit facility (such as
increases to the loan amount, changes to the size and scope of the
project, or removing all or part of the 15 percent minimum capital
contribution in a project), the banking organization should treat the
loan as a new ADC exposure and reevaluate the exposure to determine
whether or not it is an HVCRE exposure.
B. Revised Scope of HVCRE Exposure Definition
In the HVCRE proposal, consistent with section 214 of EGRRCPA, the
agencies proposed to require that a credit facility meet the following
three-prong criteria in order to be classified as an HVCRE exposure.
First, the credit facility must primarily finance or refinance the
acquisition, development, or construction of real property. Second, the
purpose of the credit facility must be to provide financing to acquire,
develop, or improve such real property into income-producing real
property. Finally, the repayment of the credit facility must depend
upon the future income or sales proceeds from, or refinancing of, such
real property.
The agencies received several comments on these three criteria. One
commenter stated that the agencies should provide banking organizations
more flexibility to interpret the statutory term ``primarily
finances.'' This commenter stated that there may be instances where a
credit facility should not be considered to ``primarily finance'' ADC
activities, even where more than 50 percent of the proposed use of the
funds is for ADC activities. Another commenter asked the agencies to
state that a loan secured by an owner-occupied property does not
``primarily finance'' ADC activities because the financed property is
not ``income producing.'' Another commenter asked the agencies to
clarify the meaning of the statutory term ``income-producing real
property'' and specify whether the term applies to hotel properties or
real estate that are primarily occupied by a small business, but are
leased in part.
In accordance with section 214 of EGRRCPA, the agencies also
proposed to define HVCRE exposure as ``a credit facility secured by
land or improved real property.'' The agencies stated in the HVCRE
proposal that this statutory term should be applied consistently with
the current Call Report definition for ``a loan secured by real
estate.'' Under the Call Report and FR Y-9C instructions, ``a loan is
secured by real estate'' if the estimated value of the real estate
collateral at origination (after deducting all senior liens held by
others) is greater than 50 percent of the principal amount of the loan
at origination.\15\ Therefore, for purposes of the revised HVCRE
exposure definition, the HVCRE proposal would have clarified that a
``credit facility secured
[[Page 68022]]
by land or improved real property'' referred to a credit facility that
meets this collateral criterion. Commenters generally supported using
the Call Report instructions for determining whether a loan is secured
by real estate and agreed that this clarification is consistent with
the reference in section 214 of EGRRCPA to a ``credit facility secured
by land or improved real property.''
---------------------------------------------------------------------------
\15\ See Federal Financial Institutions Examination Council,
Instructions for Preparation of Consolidated Reports of Condition
and Income: FFIEC 031 and FFIEC 041, GLOSSARY A-58 (2018); and FFIEC
051, GLOSSARY A-74 (2018).
---------------------------------------------------------------------------
For purposes of the final rule, consistent with the HVCRE proposal,
the statutory term ``credit facility secured by land or improved real
property,'' as it is used in the revised definition of HVCRE exposure,
should be interpreted in a manner that is consistent with the current
definition for ``a loan secured by real estate'' in the Call Report and
FR Y-9C instructions. For clarity, the agencies refer to the following
example, which is also contained in the glossary of the Call Report and
FR Y-9C under the term, ``loan secured by real estate.'' Assume a
banking organization loans $700,000 to a dental group to construct and
equip a building that will be used as the dental group's office. The
loan will be secured by both the real estate and the dental equipment.
At origination, the estimated values of the building, upon completion,
and the equipment are $400,000 and $350,000, respectively. The loan
should be reported as a loan secured by real estate given that the
value of the real estate collateral represents 57 percent of the loan
amount. In contrast, if the estimated values of the building and
equipment at origination are $340,000 and $410,000, respectively, the
loan should not be reported as a loan secured by real estate as the
real estate collateral only represents 48 percent of the loan amount.
In response to comments, the agencies also are clarifying that for
purposes of the final rule, consistent with the reporting requirements,
loans reported as ``Loans secured by nonfarm nonresidential
properties'' in item 1.e of Schedules RC-C, Part I and HC-C of the Call
Report and FR Y-9C, generally would not meet the criteria to be HVCRE
exposures because such loans are not dependent upon future income or
sales proceeds from, or refinancing of, the real property being
financed for repayment. However, loans that finance nonfarm,
nonresidential property construction or land development projects, as
well as loans secured by vacant lots, generally would meet the three-
prong scoping criteria for HVCRE exposures under the final rule.
Under both the HVCRE and Land Development proposals, ``other land
loans'' (generally loans secured by vacant land, except land known to
be used for agricultural purposes) were included within the scope of
the revised HVCRE exposure definition. Several commenters expressed the
view that loans to purchase vacant land should not automatically be
considered HVCRE exposures, as these loans may not have the purpose of
providing financing to develop the land or improve it into income-
producing real property. These commenters requested that the HVCRE
exposure definition apply only to a loan secured by vacant land if the
loan is extended for the purpose of developing or improving the real
property and repayment of the loan depends on the future income, sales
proceeds, or refinancing of the developed or improved land. Multiple
commenters stated that requiring a heightened risk weight for all loans
secured by vacant land could discourage investments made for the
purpose of future development.
For purposes of the final rule, the agencies are clarifying that
under the final rule ``other land loans'' are not automatically
included as an HVCRE exposure. Such loans would be included in the
scope of the revised HVCRE exposure definition if they meet the three-
prong criteria of an HVCRE exposure. For example, if a loan is made to
acquire or refinance raw or developed land, and the source of repayment
is dependent upon the income produced from resale or refinance of the
land, then the loan meets all three prongs of the criteria. This would
be consistent with the statutory definition and with the risks posed by
such loans. The inclusion of such land loans in the scope of the
revised HVCRE exposure definition is also consistent with the Call
Report's and FR Y-9C's inclusion of ``other land loans'' with
construction and development loans. Furthermore, treating such loans as
HVCRE exposures is consistent with the Interagency Guidelines on Real
Estate Lending Policies (referred to as ``interagency real estate
guidelines''), which recognize the heightened risk profile of ``raw
land'' loans, through the supervisory loan-to-value ratio assigned to
such loans.\16\ Aligning the treatment of loans secured by vacant land
under the regulatory reporting requirements, the interagency real
estate guidelines, and the regulatory capital requirements should
promote a simpler framework that reflects the elevated risks generally
posed by these exposures. In certain cases, land loans could still
qualify for one of the exclusions under the revised HVCRE exposure
definition. For example, if the repayment of a loan secured by vacant
land is not dependent on income to be produced from the property, or on
the future sale of the financed property, the banking organization may
be able to exclude the loan from the HCVRE exposure category if the
loan were made in accordance with the banking organization's loan
underwriting standards for permanent financings and classified
accordingly. Therefore, the agencies are clarifying for purposes of the
final rule that ``other land loans'' or ``raw land'' loans that meet a
banking organization's loan underwriting standards for permanent
financings generally would not meet the three-prong criteria of an
HVCRE exposure as a permanent financing would generally not be
dependent upon future income or sales proceeds from, or refinancing of,
the real property being financed for the repayment of such credit
facility.
---------------------------------------------------------------------------
\16\ See Board, OCC, and FDIC, Interagency Guidelines For Real
Estate Lending Policies: 12 CFR part 208 Appendix C (Board); 12 CFR
part 34 Appendix A (OCC); 12 CFR part 365 Appendix A (FDIC).
---------------------------------------------------------------------------
C. Exclusions From the Revised HVCRE Exposure Definition
Under the HVCRE proposal, the exposures described in the following
paragraphs would have been excluded from the definition of HVCRE
exposure:
1. One- to Four-Family Residential Properties
Consistent with section 214 of EGRRCPA, the HVCRE proposal would
have excluded from the definition of HVCRE exposure, credit facilities
that finance the acquisition, development, or construction of one- to
four-family residential properties. In the HVCRE proposal, the agencies
stated that the scope of the one- to four-family residential properties
exclusion should be consistent with the definition of one- to four-
family residential property set forth in the interagency real estate
lending guidelines. The interagency real estate lending guidelines
define a one- to four-family residential property as a property
containing fewer than five individual dwelling units, including
manufactured homes permanently affixed to the underlying property (when
deemed to be real property under state law). The interagency real
estate lending guidelines further state that the construction of
condominiums and cooperatives should be considered multifamily
construction for risk-management purposes, including for the purpose of
determining the appropriate loan-to-value ratio. Accordingly, the HVCRE
proposal stated that loans that finance the construction of
[[Page 68023]]
condominiums and cooperatives generally should not qualify for
exclusion from the HVCRE exposure treatment as one- to four-family
residential properties. Additionally, in order to qualify for this
exclusion, the HVCRE proposal stated that credit facilities extended
for the purpose of the acquisition, development, or construction of
properties that are one- to four-family residential properties would
include both loans to construct one- to four-family residential
structures and loans that finance both the acquisition of the land and
the development or construction of one- to four-family residential
structures, including lot development loans. However, loans used solely
to acquire undeveloped land would fall outside the scope of the one- to
four-family residential properties exclusion regardless of how the land
is zoned.
In response to the HVCRE proposal, the agencies received several
comments on the scope of the proposed exclusion for one- to four-family
residential properties from the HVCRE exposure definition. Many
commenters stated that the HVCRE exposure definition should exclude
loans to finance any development where the units are rentals or owner-
occupied. Several commenters requested that the agencies align the one-
to four-family residential properties exclusion with the reporting
instructions for one- to four-family residential construction loans in
the Call Report and FR Y-9C. Several commenters stated that if the
agencies aligned the exclusion criteria with the regulatory reporting
instructions, one- to four-unit condominium residential properties
would qualify for the one- to four-family residential properties
exclusion, as the loans are secured and reported as one- to four-family
residential properties. These commenters also stated that if the
agencies follow the definition of one- to four-family residential
property loans set forth in the interagency real estate lending
guidelines, the Call Report and FR Y-9C instructions should be amended
to align with the revised HVCRE exposure definition.
After considering the comments on the HVCRE proposal, the agencies
have decided to align the exclusion of loans that finance one- to four-
family residential properties with the definition and reporting of one-
to four-family residential property loans set forth in the Call Report
and FR Y-9C, rather than the definition set forth in the interagency
real estate lending guidelines. Allowing banking organizations to apply
a consistent definition of one- to four-family residential property
construction loans in this manner should simplify reporting
requirements. Under the final rule, one- to four-family residential
property construction loans reported in the Call Report and FR Y-9C (in
item 1.a. (1) of Schedules RC-C, Part I and HC-C) will qualify for the
one- to four-family residential property exclusion.\17\ Construction
loans secured by single-family dwelling units, duplex units, and
townhouses are reported in the Call Report and FR Y-9C (in item 1.a.
(1) of Schedules RC-C, Part I and HC-C) and therefore these types of
loans will qualify for the one- to four-family residential property
exclusion. Condominium and cooperative construction loans will also
qualify for the one- to four-family residential property exclusion,
even if the loan is financing the construction of a building with five
or more dwelling units as long as the repayment of the loan comes from
the sale of individual condominium dwelling units or individual
cooperative housing units. This treatment is consistent with the
definition and reporting of one- to four-family residential property
loans set forth in the Call Report and FR Y-9C.
---------------------------------------------------------------------------
\17\ See Federal Financial Institutions Examination Council,
Instructions for Preparation of Consolidated Reports of Condition
and Income: FFIEC 031 and FFIEC 041, RC-C-4 (2018); and FFIEC 051,
RC-C-6 (2018).
---------------------------------------------------------------------------
The agencies are also clarifying for purposes of the final rule
that loans for multifamily residential property construction and land
development purposes and loans secured by vacant lots in established
multifamily residential sections would not qualify for the one- to
four-family residential properties exclusion. The construction of
rental apartment buildings with 5 or more dwelling units are reported
in the Call Report and FR Y-9C (in item 1.a.(2) of Schedules RC-C, Part
I and HC-C). The agencies also note that in instances where a credit
facility's underwriting materially changes, which may occur when a
project changes from relying on the sale of individual condominium
dwelling units for repayment to relying instead on apartment rental
income for repayment, the banking organization should reevaluate the
exposure to determine whether or not it is an HVCRE exposure.
a. Land Development
Commenters on the HVCRE proposal indicated that it remained unclear
whether a facility that finances the purchase of land to be developed
into lots but does not finance the construction of dwellings would be
considered one- to four-family residential property financing and
excluded from the definition of HVCRE exposure. After reviewing the
comments on the HVCRE proposal related to the one- to four-family
residential property exclusion, the agencies determined that the
regulatory capital treatment for lot development loans warranted
further consideration and clarification. Therefore, the agencies issued
the Land Development proposal, which proposed to add a new paragraph to
the definition of HVCRE exposure providing that the exclusion for one-
to four-family residential properties would not include credit
facilities that solely finance land development activities, such as the
laying of sewers, water pipes, and similar improvements to land,
without any construction of one- to four-family residential structures.
In order for a loan to be eligible for this exclusion, the Land
Development proposal provided that the credit facility would be
required to include financing for construction of one- to four-family
residential structures. Therefore, a credit facility that combines the
financing of land development and the construction of one- to four-
family residential structures would qualify for the one- to four-family
residential properties exclusion. However, a facility that solely
finances land development generally would have met the three-prong
criteria of an HVCRE exposure.
In response to the Land Development proposal, multiple commenters
stated that treating land development loans as HVCRE exposures and thus
applying heightened capital requirements to them could lead to
increases in fees, costs, and interest rates for consumers who will
purchase the completed one- to four-family residences. Another
commenter stated that treating land development loans as HVCRE
exposures could create undue barriers to the development of new
housing, including affordable housing.
Several commenters acknowledged the heightened risk that land
development and lot development loans pose to banking organizations and
stated that such loans warrant heightened scrutiny. However, these
commenters further stated that a banking organization's management of
such risk should be assessed as part of the supervisory process and not
addressed through a one-size-fits-all capital requirement.
Multiple commenters stated that for a variety of financial, tax,
and liability reasons, standard practice is to establish one entity to
develop lots and a separate entity to erect structures on the land.
Commenters described that under the proposal, a loan to the first
entity would
[[Page 68024]]
be considered an HVCRE exposure, while a loan to the second entity
would qualify for the exclusion. Another commenter stated that land
development financing structures would prevent many loans from
qualifying for the contributed capital exclusion because profits are
normally and customarily distributed to investors throughout the
project as lots are sold, rather than retained until the loan is paid
off. Several commenters also stated that they believed the Land
Development proposal was inconsistent with their interpretation of the
statutory definition of HVCRE ADC.
One commenter on the Land Development proposal requested
clarification on whether two loans originated simultaneously--a land
acquisition and development loan and a loan for the construction of
one- to four-family properties--would be eligible for the one- to four-
family residential properties exclusion. The same commenter asked for
clarification on whether a land development loan originated prior to
the origination of the construction loan would cease to be an HVCRE
exposure upon origination of the construction loan for one- to four-
family properties.
After reviewing the comments to the Land Development proposal, the
agencies believe that the proposed treatment of lot development loans
for the purpose of the one- to four-family residential properties
exclusion is more risk-sensitive and promotes safety and soundness, and
therefore, the final rule includes the proposed treatment of these
exposures. Under the final rule, this treatment would be consistent
with the reporting instructions for such loans in the Call Report and
FR Y-9C. Loans for the development of building lots and loans secured
by vacant land are reported in item 1.a.(2), ``Other construction loans
and all land development and other land loans'', of Schedules RC-C,
Part I and HC-C unless the loan also finances the construction of one-
to four-family residential properties. The final rule provides that
loans used solely to acquire undeveloped land would not be within the
scope of the one- to four-family residential properties exclusion,
regardless of how the land is zoned. A credit facility should not be
eligible for the one- to four-family residential properties exclusion
if it does not finance the construction of one- to four-family
residential structures.
The agencies do not anticipate that the final rule will have a
negative impact on the financing of affordable housing. This is because
credit facilities that finance the acquisition, development, or
construction of real property projects for which the primary purpose is
community development will continue to be excluded from the definition
of HVCRE exposure. The exclusion for community development projects is
described in more detail in the following section.
While several commenters stated that the risk associated with land
development loans should be addressed through the supervisory process,
rather than capital requirements, the agencies believe that including
such loans in the revised HVCRE exposure definition is appropriate
given that the agencies have long considered land development loans to
be relatively riskier than construction loans. For example, consistent
with this view, the interagency real estate lending guidelines require
more stringent supervisory loan-to-value ratios for land development
loans (75 percent) than for construction loans (80 or 85 percent
depending on property type) because of elevated credit risk.\18\
Furthermore, in some cases, land development loans may be made for
speculative purposes, generate no cash flow prior to resale, and
require other sources of cash to service the debt. For these reasons,
the agencies believe that it is important to address the risk of these
exposures through both the normal supervisory process and the
regulatory capital standards.
---------------------------------------------------------------------------
\18\ See Board, OCC, and FDIC, Interagency Guidelines For Real
Estate Lending Policies: 12 CFR part 208 Appendix C (Board); 12 CFR
part 34 Appendix A (OCC); 12 CFR part 365 Appendix A (FDIC).
---------------------------------------------------------------------------
In addition, the clarification of the treatment of land development
loans in the revised HVCRE exposure definition is consistent with the
statutory definition. As stated in the Land Development proposal, this
revision would generally align with the instructions set forth in the
Call Report and FR Y-9C in item 1.a.(1) of Schedules RC-C, Part I and
HC-C. Exposures reported in this line item finance the construction of
one- to four-family residential structures or dwelling units as other
construction loans and all land development and other land loans are
reported in item 1.a.(2) of Schedules RC-C, Part I and HC-C. Including
specific language in the revised HVCRE exposure definition to clarify
that loans that solely finance improvements such as the laying of
sewers, water pipes, and similar improvements to land, will not qualify
for the one- to four-family residential properties exclusion is
intended to help banking organizations apply the definition
consistently and promote uniform application of the capital rule.
In response to comments received on both proposals, the agencies
are clarifying for purposes of the final rule that a facility that
finances the purchase of land to be developed into lots, but does not
include the construction of dwellings, does not qualify for the one- to
four-family residential properties exclusion. Based on the risks
arising from land development loans, the agencies believe it would be
imprudent to exclude from heightened capital requirements loans that
solely finance the preparation of land for the construction of new
structures, but do not actually finance the construction of one- to
four-family residential structures.
Under the final rule, combination land acquisition, lot
development, and construction loans that finance the construction of
one- to four-family residential structures qualify for the one- to
four-family residential property exclusion, as these exposures are
reported in the Call Report and FR Y-9C in item 1.a.(1) of Schedules
RC-C, Part I and HC-C. Such combination loans that finance land
development and one- to four-family residential structures generally
pose less risk than loans that solely finance land acquisition or lot
development. Applying the exclusion for the financing of one- to four-
family residential properties in a manner consistent with the Call
Report and FR Y-9C reporting requirements will simplify the reporting
requirements for these exposures and provide greater consistency in the
risk-based capital treatment of these exposures across banking
organizations.
The agencies are also clarifying for purposes of the final rule
that when a land acquisition and development loan and a loan to
construct one- to four-family dwellings are originated simultaneously,
the individual exposures must be evaluated separately to determine
whether each loan on its own qualifies for an exclusion under the
revised HVCRE exposure definition. Similarly, for a land loan that is
originated prior to the origination of the construction loan, the land
loan and the construction loan must be evaluated individually to
determine whether either or both loans could be classified as a non-
HVCRE exposure. Banking organizations should refer to the requirements
for reclassifying an exposure as a non-HVCRE exposure, which are
contained in the revised HVCRE exposure definition and described in
more detail later in this Supplementary Information.
For the reasons stated above, the agencies are adopting the Land
Development proposal as proposed.
[[Page 68025]]
Therefore, under the final rule, a facility that solely finances land
development will be categorized as an HVCRE exposure, unless the
exposure meets an exclusion criterion from the revised HVCRE exposure
definition.
2. Community Development
Consistent with section 214 of EGRRCPA, the HVCRE proposal would
have excluded from the revised HVCRE exposure definition credit
facilities that finance the acquisition, development, or construction
of real property projects for which the primary purpose is community
development, as defined by the agencies' Community Reinvestment Act
(CRA) regulations.\19\ Generally, these types of projects include
affordable housing, community services targeted to low- and moderate-
income individuals, economic development through the financing of small
farms and small businesses that meet a size and purpose test, and
activities that revitalize and stabilize certain designated
geographical areas.
---------------------------------------------------------------------------
\19\ 12 CFR part 24 (OCC); 12 CFR part 228 (Board); 12 CFR part
345 (FDIC).
---------------------------------------------------------------------------
As stated in the HVCRE proposal, under the agencies' CRA
regulations, loans must be evaluated to determine whether they meet the
criteria for community development projects. As an example, the
agencies stated that an ADC loan conditionally taken out with U.S.
Small Business Administration (SBA) section 504 financing would have to
be evaluated under the criteria for community development projects in
the agencies' CRA regulations in order to determine if the loan would
qualify for this exclusion.
The agencies received numerous comments on the community
development exclusion. A few commenters supported linking the exemption
for community development loans to the CRA regulations and stated the
proposed approach was clear and did not need further clarification.
However, other commenters raised operational concerns with the
exclusion. Multiple commenters objected to the proposal's requirement
that loans conditionally taken out with SBA section 504 financing would
have to be evaluated against the agencies' CRA regulations to determine
whether such exposures could be excluded from the HVCRE exposure
definition. These commenters stated that all SBA section 504 loans
should be excluded from the definition of HVCRE exposure, regardless of
whether they qualify as community development investments under the
agencies' CRA regulations. Other commenters stated that the exclusion
for community development exposures should apply, without exception, to
all real estate loans, including interim lender loans and third-party
lender loans, made in connection with either the SBA 7(a) or 504 loan
program.
Notwithstanding the comments in favor of broadening the exclusion,
the agencies are adopting the proposed community development exclusion
in the final rule without modification. Referring to the CRA
regulations \20\ to determine whether an exposure qualifies for the
community development exclusion in the revised definition of HVCRE
exposure is consistent with the agencies' practice of looking to the
same or substantially similar terms in other regulations or regulatory
reporting instructions to clarify the interpretation of the statutory
definition of an HVCRE ADC loan.
---------------------------------------------------------------------------
\20\ 12 CFR part 24 (OCC); 12 CFR part 228 (Board); 12 CFR part
345 (FDIC). See also Interagency Questions and Answers Regarding
Community Reinvestment, which provide guidance to financial
institutions and the public on the agencies' CRA regulations. 78 FR
69671 (November 20, 2013).
---------------------------------------------------------------------------
The agencies note that it is possible that some loans extended in
connection with SBA guarantees or participations may not meet the
criteria for community development under the agencies' CRA regulations.
The final rule does not contain a broad exclusion from the HVCRE
exposure definition for all loans made in connection with SBA programs.
An ADC loan that is not conditionally guaranteed by a U.S. government
agency or does not qualify for the community development exclusion
should be categorized as an HVCRE exposure, unless the exposure meets
another exclusion criterion in the final rule. While no broad exemption
for loans made in connection with SBA programs exists under the final
rule, the agencies generally view the SBA 7(a) guaranty to the lender
as ``conditional,'' based on the lender following certain requirements
established by the program. As permitted by the capital rule, the
portion of a loan conditionally guaranteed by a U.S. government agency
receives a 20 percent risk weighting under the standardized approach in
the capital rule.
Additionally, the agencies are clarifying for purposes of the final
rule that some interim-lender loans and third-party lender loans, made
in connection with the SBA 504 loan program, may be considered in
certain instances to be bridge loans. Bridge loans generally do not
qualify as permanent financing because the cash flow being generated by
the real property usually is insufficient to support the debt service
and expenses of the real property. Bridge loans that finance ADC
projects often pose greater credit risk than permanent loans, and,
therefore, should be subject to a higher risk weight. However, if an
interim-lender loan or third-party lender loan made in connection with
the SBA 504 loan program meets the criteria for community development
under the agencies' CRA regulations, the exposure could be excluded
from the HVCRE exposure definition.
3. Agricultural Land
In the HVCRE proposal, the agencies proposed to exclude from the
revised HVCRE exposure definition credit facilities financing the
acquisition, development, or construction of agricultural land. The
Supplementary Information to the HVCRE proposal stated that
``agricultural land,'' for the purpose of the revised HVCRE exposure
definition, should have the same meaning as ``farmland,'' as used in
the Call Report and FR Y-9C instructions.\21\ In these instructions,
the term ``farmland'' includes all land known to be used or usable for
agricultural purposes but excludes loans for farm property construction
and land development purposes.
---------------------------------------------------------------------------
\21\ For the definition of loans secured by farmland, see the
Call Report Instructions for Schedule RC-C, Part I, Item 1.b, and
the FR Y-9C Instructions for Schedule HC-C, Part I, Item 1.b.
---------------------------------------------------------------------------
Two commenters stated that the proposed exemption for agricultural
land was clear and did not need further clarification. Accordingly, the
agencies are adopting this proposed exclusion from the definition of
HVCRE exposure without change.
4. Loans on Existing Income-Producing Properties That Qualify as
Permanent Financings
The revised definition of HVCRE exposure in the HVCRE proposal
would have excluded credit facilities that finance the acquisition or
refinancing of existing income-producing real property secured by a
mortgage on such property, so long as the cash flow generated by the
real property covers the debt service and expenses of the property in
accordance with the lender's underwriting criteria for permanent loans.
The agencies also proposed to exclude credit facilities financing
improvements to existing real property secured by a mortgage on such
property.
Commenters generally supported this aspect of the HVCRE proposal.
The agencies note that they may review the reasonableness of a
supervised entity's underwriting criteria for permanent loans through
the supervisory process to
[[Page 68026]]
ensure the real estate lending policies are consistent with safe and
sound banking practices. The agencies are adopting this exclusion from
the proposed definition of HVCRE exposure without modification.
5. Certain Commercial Real Property Projects
The HVCRE proposal would have excluded from the revised HVCRE
exposure definition credit facilities for certain commercial real
property projects that are underwritten in a safe-and-sound manner in
accordance with the interagency real estate lending guidelines and
where the borrower has contributed a specified amount of capital to the
project. The HVCRE proposal provided that a credit facility financing a
commercial real property project would be required to meet four
criteria to qualify for this exclusion from the revised HVCRE exposure
definition. First, the loan-to-value ratio must be less than or equal
to the applicable supervisory loan-to-value ratio in the interagency
real estate lending guidelines. Second, the borrower must have
contributed capital to the project of at least 15 percent of the real
property's appraised ``as completed'' value. Third, the required
capital must be contributed prior to the banking organization's
advancement of funds, except for nominal sums meant to secure the
banking organization's lien on the real property. Fourth, the 15
percent capital contribution must be contractually required to remain
in the project until the loan can be reclassified as a non-HVCRE
exposure.
a. Contributed Capital
As proposed, the HVCRE exposure definition provided that cash,
unencumbered readily marketable assets, development expenses paid out-
of-pocket, and contributed real property or improvements could count as
forms of contributed capital. The agencies stated that a banking
organization could consider costs incurred by the project and paid by
the borrower, prior to the advancement of funds by the banking
organization, as out-of-pocket, development expenses paid by the
borrower.
The HVCRE proposal provided that the value of contributed real
property means the appraised value of real property contributed by the
borrower as determined under the appraisal standards prescribed by
section 1110 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (12 U.S.C. 3339). The agencies further stated
that the value of the real property that could count toward the 15
percent contributed capital requirement would be reduced by the
aggregate amount of any liens on the real property securing the HVCRE
exposure.
Several commenters agreed with this aspect of the proposal, noting
that it is generally consistent with industry practice. A few
commenters asked the agencies to clarify whether funds borrowed from a
third party (such as another banking organization, an owner or parent
organization, or a related party) could be included in a borrower's
capital contribution. One commenter also asked the agencies to clarify
if other real estate outside of the project that has been pledged
toward the loan could count toward the 15 percent contributed capital
requirement.
A few commenters asked the agencies to clarify how a borrower could
contribute readily marketable assets (such as securities) to a project
for the purpose of this exclusion. These commenters noted that the
agencies previously have not allowed for pledged assets to count as
borrower-contributed capital. The commenters stated that requiring a
borrower to sell such assets and contribute the cash proceeds would
render this provision of the statutory language meaningless, since
borrower-contributed capital in the form of cash is addressed
separately.
In response to the questions about borrowed funds as a form of
capital contribution, the agencies are clarifying for purposes of the
final rule that any such borrowed funds should not be derived from,
related to, or encumber the project that the credit facility is
financing or encumber any collateral that has been contributed to the
project to ensure that tangible equity is invested in the project.
Additionally, the recognition of any contribution of funds to a project
must be done so in conformance with safe and sound lending practices
and should be in accordance with the banking organization's
underwriting criteria and its internal policies.
In addition, for purposes of the final rule, contributed real
property or improvements should be directly related to the project to
be eligible to count toward the 15 percent contributed capital
requirement. Real estate not developed as part of the project should
not be counted toward the contributed capital requirement under the
revised HVCRE exposure definition.
For purposes of the final rule, the agencies are clarifying that
they would interpret the statutory term ``unencumbered readily
marketable assets'' for the purpose of the revised HVCRE exposure
definition consistent with the definition and treatment of readily
marketable collateral contained within the interagency real estate
lending guidelines. Consistent with the interagency real estate lending
guidelines, readily marketable collateral means insured deposits,
financial instruments, and bullion in which the lender has a perfected
interest. For collateral to be considered ``readily marketable'' by a
lender, the lender's expectation would be that the financial instrument
and bullion would be salable under ordinary circumstances with
reasonable promptness at a fair market value determined by quotations
based on actual transactions, an auction or similarly available daily
bid and ask price market. Readily marketable collateral should be
appropriately discounted by the lender consistent with the lender's
usual practices for making loans secured by such collateral. The
agencies note that the reasonableness of a lender's underwriting
criteria may be reviewed through the supervisory process to ensure the
real estate lending policies are consistent with safe and sound banking
practices. With the aforementioned clarifications, the agencies are
finalizing this aspect of the proposal without change.
b. ``As Completed'' Value Appraisal
The HVCRE proposal would have required that the 15 percent capital
contribution be calculated using the real property's appraised ``as
completed'' value. In the proposal, the agencies stated that they would
permit the use of an ``as is'' appraisal in instances where an ``as
completed'' value appraisal was not available, such as in the case of
purchasing raw land without plans for development in the near term. In
addition, the agencies stated they would allow the use of an evaluation
of the real property instead of an appraisal to determine the ``as
completed'' appraised value, for purposes of the revised HVCRE exposure
definition, where the agencies' appraisal regulations \22\ permit
evaluations to be used in lieu of appraisals.
---------------------------------------------------------------------------
\22\ See OCC: 12 CFR part 34, subpart C; Board: 12 CFR part 208,
subpart E, and 12 CFR part 225, subpart G; and FDIC: 12 CFR part
323.
---------------------------------------------------------------------------
A few commenters asked the agencies to allow greater flexibility in
applying the appraisal requirement. The commenters stated that
measuring the capital contribution relative to an appraised ``as
stabilized'' value may be appropriate for certain projects. Another
commenter suggested allowing the lower of cost or appraised value for
the purpose of calculating the ``as completed'' value. Section 214 of
[[Page 68027]]
EGRRCPA specifically requires an appraised ``as completed'' value for
the contributed capital exclusion from the statutory definition of
HVCRE ADC loan. Therefore, other than the clarifications contained in
this Supplementary Information pertaining to ``as is'' appraisals for
raw land loans and evaluations for loans in amounts under certain
specified thresholds, the agencies are adopting this aspect of the
proposal without change.
c. Project
In the HVCRE proposal, the agencies stated that the 15 percent
capital contribution and the ``as completed'' value appraisal would be
measured in relation to a ``project.'' The agencies noted that some
credit facilities for the acquisition, development, or construction of
real property may have multiple phases as part of a larger construction
or development project. The agencies stated that in the case of a
project with multiple phases, in order for a loan financing a phase to
be eligible for the contributed capital exclusion, the phase must have
its own appraised ``as completed'' value or an appropriate evaluation
in order for it to be deemed a separate ``project'' for the purpose of
the 15 percent capital contribution calculation.
A few commenters asked the agencies to clarify whether individual
phase-level appraisals would always be required. Another commenter
asked whether it would be possible to value all the phases of a
multiphase project as one project, stating that obtaining individual
phase-level appraisals may not always be necessary or appropriate.
The agencies are adopting this aspect of the rule as proposed. For
purposes of the final rule, the agencies expect that each project phase
being financed by a credit facility have a proper appraisal or
evaluation with an associated ``as completed'' value. Where appropriate
and in accordance with the banking organization's applicable
underwriting standards, a banking organization may look at a multiphase
project as a complete project rather than as individual phases.
6. Reclassification as a Non-HVCRE Exposure
Consistent with section 214 of EGRRCPA, for purposes of the HVCRE
proposal, the agencies stated that a banking organization would have
been allowed to reclassify an HVCRE exposure as a non-HVCRE exposure
when the substantial completion of the development or construction on
the real property has occurred and the cash flow generated by the
property covered the debt service and expenses on the property in
accordance with the banking organization's loan underwriting standards
for permanent financings. Commenters generally supported allowing a
banking organization to reclassify an HVCRE exposure as a non-HVCRE
exposure once the exposure meets the statutory criteria for such
reclassification as a non-HVCRE exposure. One commenter requested that
the agencies provide more specificity with regard to the terms that
agencies would expect to be included in a lender's underwriting
standards for permanent financing.
The agencies are clarifying for purposes of the final rule that the
reclassification criteria from an HVCRE exposure to a non-HVCRE
exposure relies on the banking organization's loan underwriting
standards for permanent financings. The agencies expect a banking
organization to have prudent, clear, and measurable underwriting
standards. The reasonableness of a banking organization's underwriting
criteria for permanent loans may be reviewed through the supervisory
process. The agencies are adopting this aspect of the proposal without
change.
7. Related Interagency Guidance
On April 6, 2015, the agencies published FAQs on the capital rule,
including FAQs on HVCRE exposures.\23\ In the HVCRE proposal, the
agencies invited comment on the potential advantages and disadvantages
of incorporating the agencies' interpretations of the terms used in the
revised HVCRE exposure definition into the rule text or in another
published format (such as guidance or another FAQ document). A few
commenters addressed this aspect of the proposal and stated that the
agencies should rescind or withdraw any existing FAQs that are no
longer in effect. Some commenters stated that the agencies should
publish new FAQs as necessary and issue new interpretations of the
revised definition of HVCRE exposure only after first publishing them
for notice and public comment. One commenter stated that the
Interagency Guidance on CRE Concentration Risk Management \24\ should
be adjusted to reflect the revised HVCRE exposure definition. Two
commenters stated that the agencies should sponsor periodic industry
forums to monitor the application and administration of rules
pertaining to commercial real estate markets. According to the
commenters, these forums would allow stakeholders to provide
transparent feedback to the agencies on the implementation of the
capital rule.
---------------------------------------------------------------------------
\23\ ``Frequently Asked Questions on the Regulatory Capital
Rule,'' OCC Bulletin 2015-23 (April 6, 2016), available at: https://www.occ.gov/news-issuances/bulletins/2015/bulletin-2015-23.html.
``SR 15-6: Interagency Frequently Asked Questions (FAQs) on the
Regulatory Capital Rules'' (April 5, 2015), available at: https://www.federalreserve.gov/supervisionreg/srletters/sr1506.htm; FDIC FIL
16-2015, available at https://www.fdic.gov/news/news/financial/2015/fil15016.html.
\24\ ``Concentrations in Commercial Real Estate Lending, Sound
Risk Management Practices: Interagency Guidance on CRE Concentration
Risk Management,'' OCC Bulletin 2006-46 (December 6, 2006),
available at: https://www.occ.gov/news-issuances/bulletins/2006/bulletin-2006-46.html. ``SR 07-1: Interagency Guidance on
Concentrations in Commercial Real Estate'' (January 4, 2007),
available at: https://www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm; FDIC FIL 104-2006, available at https://www.fdic.gov/news/news/financial/2006/fil06104.html.
---------------------------------------------------------------------------
After reviewing the comments received, the agencies have decided to
rescind all outstanding HVCRE exposure-related FAQs upon the effective
date of the final rule. FAQs related to topics other than the
superseded definition of HVCRE exposure will not be rescinded. Banking
organizations that have questions about the final rule should contact
their primary federal supervisor. In addition, upon the effective date
of the final rule, the HVCRE exposure section of the interagency
statement will no longer be applicable. Banking organizations must
thereafter evaluate ADC credit facilities in accordance with the
revised definition of HVCRE exposure in this final rule.
III. Regulatory Analyses
A. Paperwork Reduction Act
Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and the respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The OMB control number for the OCC is
1557-0318, Board is 7100-0313, and FDIC is 3064-0153. These information
collections relate to the regulatory capital rules for each agency.
However, the agencies expect that these information collections will
not be affected by this final rule and therefore no submissions will be
made under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and Sec.
1320.11 of the OMB's implementing regulations (5 CFR part
[[Page 68028]]
1320) for each of the agencies' regulatory capital rules.\25\
---------------------------------------------------------------------------
\25\ The OCC and FDIC submitted their information collections to
OMB at the proposed rule stage. However, these submissions were done
solely in an effort to apply a conforming methodology for
calculating the burden estimates and not due to the proposed rule
change in the definition of HVCRE exposure. In particular, the
change to the definition of HVAC exposure at the proposed stage, and
now at the final rule stage, does not result in a change in the
current burden. OMB filed comments requesting that the agencies
examine public comment in response to the proposed rule and describe
in the supporting statement of its next collection any public
comments received regarding the collection as well as why (or why it
did not) incorporate the commenter's recommendation. The agencies
received no comments on the information collection requirements.
Since the proposed rule stage, the agencies have conformed their
respective methodologies in a separate final rulemaking titled,
Regulatory Capital Rule: Implementation and Transition of the
Current Expected Credit Losses Methodology for Allowances and
Related Adjustments to the Regulatory Capital Rule and Conforming
Amendments to Other Regulations, 84 FR 4222 (February 14, 2019), and
have had their submissions approved through OMB. As a result, the
agencies information collections related to the regulatory capital
rules are currently aligned and therefore no submission will be made
to OMB.
---------------------------------------------------------------------------
The final rule also requires changes to the Call Reports (FFIEC
031, FFIEC 041, and FFIEC 051; OMB Nos. 1557-0081 (OCC), 7100-0036
(Board), and 3064-0052 (FDIC)) and Risk-Based Capital Reporting for
Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC
101; OMB Nos. 1557-0239 (OCC), 7100-0319 (Board), and 3064-0159
(FDIC)), and Consolidated Financial Statements for Holding Companies
(FR Y-9C; OMB No. 7100-0128), which will be addressed in separate
Federal Register notices.
B. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA),
requires an agency, in connection with a final rule, to prepare a final
Regulatory Flexibility Analysis describing the impact of the rule on
small entities (defined by the SBA for purposes of the RFA to include
commercial banks and savings institutions with total assets of $600
million or less and trust companies with total assets of $41.5 million
of less) or to certify that the final rule would not have a significant
economic impact on a substantial number of small entities.
As of December 31, 2018, the OCC supervises 782 small entities.\26\
---------------------------------------------------------------------------
\26\ The OCC calculated the number of small entities using the
SBA's size thresholds for commercial banks and savings institutions,
and trust companies, which are $600 million and $41.5 million,
respectively. Consistent with the General Principles of Affiliation,
13 CFR 121.103(a), the OCC counted the assets of affiliated
financial institutions when determining whether to classify a
national bank or Federal savings association as a small entity.
---------------------------------------------------------------------------
The final rule applies to all OCC-supervised depository
institutions, except for qualifying community banking organizations
electing to use the Community Banking Leverage Ratio Framework. Two
hundred and eleven small OCC-supervised institutions report HVCRE
exposures. Therefore, the rule will affect a substantial number of
small entities. However, the OCC does not find that the impact of this
final rule will be economically significant.
Therefore, the OCC certifies that the final rule will not have a
significant economic impact on a substantial number of OCC-supervised
small entities.
The final rule impacts three principal areas: (1) The impact
associated with implementing revisions to the capital rule to make the
definition of an HVCRE exposure consistent with the new statutory
definition; (2) the capital impact associated with implementing
revisions to the one- to four-family residential properties exclusion
in the revised HVCRE exposure definition and, (3) the impact associated
with the time required to update policies and procedures.
As described in the Supplementary Information section in the
preamble to this final rule, the OCC believes the change to the
definition of HVCRE exposure will result in fewer loans being deemed
HVCRE exposures. Therefore, the amount of capital required will
decrease for impacted OCC-supervised entities. Further, the OCC
believes no currently reported non-HVCRE acquisition, development, or
construction (ADC) exposures will be reclassified as HVCRE exposures,
and thus there will be no additional compliance burden to OCC-
supervised entities for the non-HVCRE component of their ADC
portfolios. The final rule will not require OCC-supervised entities to
amend previously filed reports as OCC-supervised entities adjust their
estimates of existing HVCRE exposures. This will serve to minimize the
compliance burden for OCC-supervised entities.
Compliance burdens that OCC-supervised entities may face include:
(1) Updating policies and procedures to classify newly issued HVCRE
loans; and (2) time spent reevaluating existing HVCRE exposures in
order to determine if any are eligible to be reclassified and thus
receive a lower risk-weight of 100 percent; and (3) updating policies
and procedures to identify whether or not a newly issued land
development loan is eligible for the one- to four-family residential
properties exclusion in the revised HVCRE exposure definition.
Based on the OCC's supervisory experience, OCC staff estimates that
it would take an OCC-supervised institution, on average, a one-time
investment of one business week, or 40 hours, to update policies and
procedures to classify newly issued HVCRE loans and to re-evaluate
existing HVCRE exposures, and a one-time investment of one business
day, or 8 hours, to update policies and procedures to classify newly
issued land development loans.
The OCC's threshold for a significant effect is whether cost
increases associated with a rule are greater than or equal to either 5
percent of a small bank's total annual salaries and benefits or 2.5
percent of a small bank's total non-interest expense. Institutions that
do not report HVCRE exposures will incur an estimated one-time
compliance cost of $2,280 per institution (20 hours x $114 per hour),
while those that report HVCRE exposures will incur an estimated one-
time compliance cost of $4,560 per institution (40 hours x $114 per
hour). Additionally, updating policies and procedures regarding
classifying land development loans will result in an estimated one-time
compliance cost of $912 per institution (8 hours x $114 per hour). OCC
staff finds that the cost of complying with the final rule will not
exceed either of the thresholds for a significant impact on any OCC-
supervised small entities.
For this reason, the OCC certifies that the final rule will not
have a significant economic impact on a substantial number of OCC-
supervised small entities.
Board: An initial regulatory flexibility analysis (IRFA) was
included in the proposal in accordance with section 603(a) of the
Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq. (RFA). In the
IRFA, the Board requested comment on the effect of the proposed rule on
small entities and on any significant alternatives that would reduce
the regulatory burden on small entities. The Board did not receive any
comments on the IRFA. The RFA requires an agency to prepare a final
regulatory flexibility analysis unless the agency certifies that the
rule will not, if promulgated, have a significant economic impact on a
substantial number of small entities.
Under regulations issued by the Small Business Administration, a
small entity includes a bank, bank holding company, or savings and loan
holding company with assets of $600 million or less (small banking
organization).\27\ As of June 30, 2019, there were approximately 2,976
small bank holding companies,
[[Page 68029]]
133 small savings and loan holding companies, and 537 small SMBs.
---------------------------------------------------------------------------
\27\ See 13 CFR 121.201. Effective August 19, 2019, the SBA
revised the size standards for banking organizations to $600 million
in assets from $550 million in assets. 84 FR 34261 (July 18, 2019).
---------------------------------------------------------------------------
The Board has considered the potential impact of the final rule on
small entities in accordance with the RFA and has prepared a final RFA
analysis detailed below. Based on the Board's analysis, and for the
reasons stated below, the Board believes that the final rule will not
have a significant economic impact on a substantial of number of small
entities.
As discussed in this Supplementary Information, the final rule
would revise the definition of HVCRE exposure to conform to the
statutory definition of ``high volatility commercial real estate
acquisition, development, or construction (HVCRE ADC) loan,'' in
accordance with section 214 of EGRRCPA. The final rule would also
clarify that certain land development loans as defined in the Call
Report and FR Y-9C instructions are included in the revised definition
of HVCRE exposure.
For purposes of the standardized approach, loans that meet the
revised definition of an HVCRE exposure would receive a 150 percent
risk weight under the capital rule's standardized approach. A banking
organization that calculates its risk-weighted assets under the
advanced approaches of the capital rule would refer to the definition
of an HVCRE exposure in section 2 of the capital rule for purposes of
identifying wholesale exposure categories and wholesale exposure
subcategories. Based upon data reported on the FR Y-9C and on Call
Report information, as of June 30, 2019, about 19 percent of state
member banks, bank holding companies, and savings and loan holding
companies report holdings of HVCRE exposures.
The final rule would apply to all state member banks, as well as
all bank holding companies and savings and loan holding companies that
are subject to the Board's capital rule. Certain bank holding
companies, and savings and loan holding companies are excluded from the
application of the Board's capital rule. In general, the Board's
capital rule only applies to bank holding companies and savings and
loan holding companies that are not subject to the Board's Small Bank
Holding Company and Small Savings and Loan Holding Company Policy
Statement, which applies to bank holding companies and savings and loan
holding companies with less than $3 billion in total assets that also
meet certain additional criteria.\28\ Thus, most bank holding companies
and savings and loan holding companies that would be subject to the
final rule exceed the $600 million asset threshold at which a banking
organization would qualify as a small banking organization.
---------------------------------------------------------------------------
\28\ See 12 CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225,
appendix C; 12 CFR 238.9.
---------------------------------------------------------------------------
In assessing whether the final rule would have a significant impact
on a substantial number of small entities, the Board has considered the
final rule's capital impact as well as its compliance, administrative,
and other costs. As of June 30, 2019, there were 157 small state member
banks and three small bank or savings and loan holding companies that
reported combined HVCRE exposures totaling $670 million and one- to
four family residential construction loans totaling $1.2 billion. To
estimate the capital impact of the final rule, the Board assumed a
range of 75 to 95 percent of one- to four family residential
construction loans would remain exempt from the revised definition of
HVCRE exposure. Based on this assumption, the difference in required
capital would be in the range of $7 million to $36 million for small
banking organizations supervised by the Board.
In addition to capital impact, the Board has considered the
compliance, administrative, and other costs associated with the final
rule. Given that the final rule does not impact the recordkeeping and
reporting requirements that affected small banking organizations are
currently subject to, there would be no change to the information that
small banking organizations must track and report. Some small banking
organizations may incur costs associated with updating internal
policies to reflect the revised definition of HVCRE exposure, including
the treatment of land development loans. However, because the final
rule would clarify the treatment of HVCRE exposure and land development
loans that may currently be in effect at many small banking
organizations, the Board does not anticipate that a substantial number
of small banking organizations will incur significant costs to update
internal systems or policies to reflect the revised HVCRE exposure
definition. The agencies separately are updating relevant reporting
forms to the extent necessary to align with the capital rule.
The Board does not believe that the final rule duplicates,
overlaps, or conflicts with any other Federal rules. In addition, there
are no significant alternatives to the final rule. In light of the
foregoing, the Board does not believe that the final rule will have a
significant economic impact on a substantial number of small entities.
FDIC: The RFA generally requires that, in connection with a final
rulemaking, an agency prepare and make available for public comment a
final regulatory flexibility analysis describing the impact of the rule
on small entities.\29\ However, a regulatory flexibility analysis is
not required if the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The Small Business Administration (SBA) has defined ``small entities''
to include banking organizations with total assets of less than or
equal to $600 million that are independently owned and operated or
owned by a holding company with less than or equal to $600 million in
total assets.\30\ Generally, the FDIC considers a significant effect to
be a quantified effect in excess of 5 percent of total annual salaries
and benefits per institution, or 2.5 percent of total non-interest
expenses. The FDIC believes that effects in excess of these thresholds
typically represent significant effects for FDIC-supervised
institutions. For the reasons described below and under section 605(b)
of the RFA, the FDIC certifies that this rule will not have a
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\29\ 5 U.S.C. 601 et seq.
\30\ The SBA defines a small banking organization as having $600
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 84 FR 34261, effective August 19, 2019). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the covered entity is ``small'' for the purposes
of RFA.
---------------------------------------------------------------------------
As of June 30, 2019, the FDIC supervised 3,424 depository
institutions,\31\ of which 2,665 were considered small entities for the
purposes of RFA. As of that date, 2,081 small, FDIC-supervised
institutions reported a positive value on Call Report schedule RC-C
1.a(2) (other construction loans and all land development loans and
other land loans), 680 reported holding some volume of HVCRE loans, and
2,091 reported some volume of HVCRE or report a positive value on RC-C
1.a(2). The rule revises the capital treatment of HVCRE and certain
land development loans. Therefore, the FDIC estimates that the rule is
likely to affect a substantial
[[Page 68030]]
number, 2,091 (78.5 percent), of small, FDIC-supervised
institutions.\32\
---------------------------------------------------------------------------
\31\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\32\ Id.
---------------------------------------------------------------------------
This rule removes certain loans from the definition of an HVCRE
exposure and therefore, reduces the risk weight from 150 percent to 100
percent on some of the HVCRE loans held in portfolio by small, FDIC-
supervised institutions, resulting in a reduction in their risk-based
capital requirements. Institutions are permitted, but not required, to
reclassify HVCRE loans that they currently hold to take advantage of
the lower risk weight. The rule also clarifies that land development
loans for one- to four family residential properties should be
considered HVCRE, and therefore should receive a 150 percent risk
weight, going forward unless such loans would qualify for a different
exclusion. Institutions are not required to reclassify as HVCRE any
land development loans they currently hold that would, under the rule,
receive a 150 percent risk weight. Instead, they may continue to assign
a 100 percent risk weight to such loans.
For purposes of this analysis, the FDIC assumes that no current
land development loans receiving a 100 percent risk weight would be
reclassified as HVCRE at a 150 risk-weight, and that some or all
current HVCRE loans eligible for exclusion from the HVCRE category as a
result of the rule would be reclassified at a 100 percent risk weight.
There would thus be some reduction in risk-based capital requirements
among the 680 small institutions reporting some HVCRE. The amount of
the reduction would depend on the amount of each institution's current
HVCRE that is newly eligible to be excluded from that category, and
whether each institution views such reclassification as being worth the
effort. The FDIC does not have access to sufficiently granular data to
determine which HVCRE loans would qualify for a lower risk weight, nor
to determine the portion of loans eligible to be reclassified that
actually would be reclassified.
Going forward, new loans that would have been classified as HVCRE
but for this rule would receive a 100 percent risk weight instead of a
150 percent risk weight. New land development loans for one-to-four
family residential properties would receive a 150 percent risk weight
instead of a 100 percent risk weight. Future effects on risk-based
capital requirements would depend on the volume of land development
loans that small institutions issue in the future, and the volume of
loans that otherwise would have been categorized as HVCRE in their loan
portfolios that would be eligible for a lower risk weight as a result
of this rule.
The FDIC believes that the overall impact of this rule on the risk-
based capital requirements of small institutions, now and going
forward, will be small. The FDIC considered the maximum reduction in
risk-based capital for the affected small institutions under the
assumption that all of their current HVCRE loans are reclassified from
a 150 percent risk weight to a 100 percent risk weight, that their
current loan portfolios are representative of their future loan
portfolios, and that institutions would maintain the same ratio of
risk-based capital to risk-weighted assets before and after this rule
becomes effective. Under these assumptions, more than 98 percent of the
680 institutions currently reporting HVCRE would reduce their risk-
based capital by less than five percent.\33\ The actual amount and
frequency of reductions in risk-based capital would be expected to be
even less, since some portion of current and future loans would likely
still be categorized as HVCRE.
---------------------------------------------------------------------------
\33\ 669 of the 680 small institutions would experience a less
than five percent decrease in risk-based capital under the stated
assumptions.
---------------------------------------------------------------------------
As stated previously, covered institutions are not required to
reclassify as HVCRE any land development loans they currently hold that
would, under the rule, receive a 150 percent risk weight, therefore
this aspect of the final rule will not have any immediate effects on
small, FDIC-supervised institutions. To assess the maximum possible
future effect of this aspect of the final rule the FDIC also considered
the maximum increase in risk-based capital requirements for the
affected small institutions under the assumption that all current
acquisition, development and construction loans currently reported in
Call Report item RC-C-1.a(2) are land development loans for one-to-four
family residential properties, that all would be reclassified to 150
percent risk weights even though this is not required, that current
loan portfolios are representative of future loan portfolios for these
institutions, and that institutions would maintain the same ratio of
risk-based capital to risk-weighted assets before and after this rule
becomes effective. Under these assumptions, more than 93 percent of the
2,081 small institutions currently reporting loans in this category
would experience an increase in risk-based capital of less than five
percent. Specifically, there were 137 small institutions that would
experience an increase in risk-based capital of five percent or more
under the highly unlikely assumptions that all their loans reported in
Call Report item RC-C-1(a)(2) were land development loans for one-to-
four family residential property, that current loan portfolios are
representative of future loan portfolios for these institutions, and
that institutions would maintain the same ratio of risk-based capital
to risk-weighted assets before and after this rule becomes effective.
Since this Call Report item includes all commercial construction loans
and all land development loans for multifamily and commercial real
estate, far fewer than 137 small institutions would likely experience
increases in risk-based capital of five percent or greater.
The rule could pose some administrative costs for covered
institutions. The rule gives covered institutions the option to review
any loans held in portfolio that were originated after January 1, 2015
to determine if those loans meet the criteria to receive a risk weight
of 100 percent rather than 150 percent. It is difficult to accurately
estimate the costs that each institution will incur in order to conduct
reviews since it depends on each institution's volume of loans
categorized as HVCRE. The FDIC assumes that each institution will
require 40 hours of labor annually, on average, in order to conduct
such reviews. Assuming an hourly cost of $83.61,\34\ that amounts to
$3,344.40 per institution or $2,274,192 for all small, FDIC-supervised
institutions that have some volume of loans classified as HVCRE as of
the most recent reporting date. These administrative costs amount to
less than two percent of annualized salary expense, and less than one
percent of annualized noninterest expense, for all small, FDIC-
supervised institutions directly affected by the rule.\35\
---------------------------------------------------------------------------
\34\ Estimated total hourly compensation of Financial Analysts
in the Depository Credit Intermediation sector as of June 2019. The
estimate includes the May 2018 75th percentile hourly wage rate
reported by the Bureau of Labor Statistics, National Industry-
Specific Occupational Employment, and Wage Estimates. This wage rate
has been adjusted for changes in the Consumer Price Index for all
Urban Consumers between May 2018 and June 2019 (1.86 percent) and
grossed up by 51.06 percent to account for non-monetary compensation
as reported by the June 2019 Employer Costs for Employee
Compensation Data.
\35\ FDIC Call Report, June 30th, 2019.
---------------------------------------------------------------------------
As noted earlier, the rule is likely to reduce capital requirements
for some loans currently classified as an HVCRE exposure and to
increase capital requirements for certain future lot development loans.
The revised capital
[[Page 68031]]
treatment in this rule could change the volume of lending, or the types
of loans issued, by small, FDIC-supervised institutions. As described
in the preceding analysis, the FDIC believes that this effect will
likely be small given that the amendments only affect a subset of HVCRE
loans and a subset of land development loans. Finally, changes in
required capital could affect the resiliency of institutions in the
event of an economically stressful scenario. Since the changes affect
only a narrowly defined segment of institutions' loan portfolios, the
FDIC believes any increase in risk resulting from the changes is
unlikely to be material.
Based on this supporting information, the FDIC certifies that this
rule will not have a significant economic impact on a substantial
number of small entities.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \36\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the final rule in a simple and straightforward manner, and did not
receive any comments on the use of plain language.
---------------------------------------------------------------------------
\36\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
---------------------------------------------------------------------------
D. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC analyzed the final rule under the factors set forth in the
Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this
analysis, the OCC considered whether the rule includes a Federal
mandate that may result in the expenditure by State, local, and Tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted for inflation). The OCC has
determined that this rule will not result in expenditures by State,
local, and Tribal governments, or the private sector, of $100 million
or more in any one year. Accordingly, the OCC has not prepared a
written statement to accompany this final rule.
E. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\37\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions, each Federal banking agency must
consider, consistent with principles of safety and soundness and the
public interest, any administrative burdens that such regulations would
place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on insured
depository institutions generally to take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in final form.\38\
---------------------------------------------------------------------------
\37\ 12 U.S.C. 4802(a).
\38\ Id.
---------------------------------------------------------------------------
In accordance with these provisions of RCDRIA, the agencies
considered any administrative burdens, as well as benefits, that the
final rule would place on depository institutions and their customers
in determining the effective date and administrative compliance
requirements of the final rule. This final rule revises the definition
of HVCRE exposure in the capital rule to conform to the statutory
definition of HVCRE ADC loan in section 214 of EGRRCPA. In conjunction
with the requirements of RCDRIA, the final rule is effective on April
1, 2020.
F. The Congressional Review Act
For purposes of Congressional Review Act, the Office of Management
and Budget (OMB) makes a determination as to whether a final rule
constitutes a ``major'' rule.\39\ If a rule is deemed a ``major rule''
by OMB, the Congressional Review Act generally provides that the rule
may not take effect until at least 60 days following its
publication.\40\
---------------------------------------------------------------------------
\39\ 5 U.S.C. 801 et seq.
\40\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------
The Congressional Review Act defines a ``major rule'' as any rule
that the Administrator of the Office of Information and Regulatory
Affairs of the OMB finds has resulted in or is likely to result in (A)
an annual effect on the economy of $100,000,000 or more; (B) a major
increase in costs or prices for consumers, individual industries,
Federal, State, or local government agencies or geographic regions, or
(C) significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
export markets.\41\ As required by the Congressional Review Act, the
agencies will submit the final rule and other appropriate reports to
Congress and the Government Accountability Office for review.
---------------------------------------------------------------------------
\41\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Banks, Banking, Capital
adequacy, Capital requirements, Asset Risk-weighting methodologies,
Reporting and recordkeeping requirements, National banks, Federal
savings associations, Risk.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital
adequacy, Capital requirements, Asset Risk-weighting methodologies,
Reporting and recordkeeping requirements, Holding companies, State
member banks, Risk.
12 CFR Part 324
Administrative practice and procedure, Banks, Banking, Capital
adequacy, Capital requirements, Asset Risk-weighting methodologies,
Reporting and recordkeeping requirements, State savings associations,
State non-member banks, Risk.
Office of the Comptroller of the Currency
For the reasons set out in the SUPPLEMENTARY INFORMATION, the OCC
is amending 12 CFR part 3 as follows.
PART 3--CAPITAL ADEQUACY STANDARDS
0
1. The authority citation for Part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831bb, 1831n note, 1835, 3907, 3909, and
5412(b)(2)(B).
0
2. Amend Sec. 3.2 by revising the definition of a ``high volatility
commercial real estate (HVCRE) exposure'' to read as follows:
Sec. 3.2 Definitions.
* * * * *
High volatility commercial real estate (HVCRE) exposure means:
(1) A credit facility secured by land or improved real property
that, prior to being reclassified by the depository institution as a
non-HVCRE exposure pursuant to paragraph (6) of this definition--
(i) Primarily finances, has financed, or refinances the
acquisition, development, or construction of real property;
(ii) Has the purpose of providing financing to acquire, develop, or
[[Page 68032]]
improve such real property into income-producing real property; and
(iii) Is dependent upon future income or sales proceeds from, or
refinancing of, such real property for the repayment of such credit
facility;
(2) An HVCRE exposure does not include a credit facility
financing--
(i) The acquisition, development, or construction of properties
that are--
(A) One- to four-family residential properties. Credit facilities
that do not finance the construction of one- to four-family residential
structures, but instead solely finance improvements such as the laying
of sewers, water pipes, and similar improvements to land, do not
qualify for the one- to four-family residential properties exclusion;
(B) Real property that would qualify as an investment in community
development; or
(C) Agricultural land;
(ii) The acquisition or refinance of existing income-producing real
property secured by a mortgage on such property, if the cash flow being
generated by the real property is sufficient to support the debt
service and expenses of the real property, in accordance with the
national bank's or Federal savings association's applicable loan
underwriting criteria for permanent financings;
(iii) Improvements to existing income-producing improved real
property secured by a mortgage on such property, if the cash flow being
generated by the real property is sufficient to support the debt
service and expenses of the real property, in accordance with the
national bank's or Federal savings association's applicable loan
underwriting criteria for permanent financings; or
(iv) Commercial real property projects in which--
(A) The loan-to-value ratio is less than or equal to the applicable
maximum supervisory loan-to-value ratio as determined by the OCC;
(B) The borrower has contributed capital of at least 15 percent of
the real property's appraised, `as completed' value to the project in
the form of--
(1) Cash;
(2) Unencumbered readily marketable assets;
(3) Paid development expenses out-of-pocket; or
(4) Contributed real property or improvements; and
(C) The borrower contributed the minimum amount of capital
described under paragraph (2)(iv)(B) of this definition before the
national bank or Federal savings association advances funds (other than
the advance of a nominal sum made in order to secure the national
bank's or Federal savings association's lien against the real property)
under the credit facility, and such minimum amount of capital
contributed by the borrower is contractually required to remain in the
project until the HVCRE exposure has been reclassified by the national
bank or Federal savings association as a non-HVCRE exposure under
paragraph (6) of this definition;
(3) An HVCRE exposure does not include any loan made prior to
January 1, 2015; and
(4) An HVCRE exposure does not include a credit facility
reclassified as a non-HVCRE exposure under paragraph (6) of this
definition.
(5) Value of contributed real property: For the purposes of this
HVCRE exposure definition, the value of any real property contributed
by a borrower as a capital contribution shall be the appraised value of
the property as determined under standards prescribed pursuant to
section 1110 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (12 U.S.C. 3339), in connection with the
extension of the credit facility or loan to such borrower.
(6) Reclassification as a non-HVCRE exposure: For purposes of this
HVCRE exposure definition and with respect to a credit facility and a
national bank or Federal savings association, a national bank or
Federal savings association may reclassify an HVCRE exposure as a non-
HVCRE exposure upon--
(i) The substantial completion of the development or construction
of the real property being financed by the credit facility; and
(ii) Cash flow being generated by the real property being
sufficient to support the debt service and expenses of the real
property, in accordance with the national bank's or Federal savings
association's applicable loan underwriting criteria for permanent
financings.
(7) For purposes of this definition, a national bank or Federal
savings association is not required to reclassify a credit facility
that was originated on or after January 1, 2015 and prior to April 1,
2020.
* * * * *
Board of Governors of the Federal Reserve System
For the reasons set out in the Supplementary Information, part 217
of chapter II of title 12 of the Code of Federal Regulations is
proposed to be amended as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
3. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909,4808, 5365, 5368, 5371; Pub. L. 115-174, 132 Stat. 1296.
Subpart A--General Provisions
0
4. Section 217.2 is amended by revising the definition of a ``high
volatility commercial real estate (HVCRE) exposure'' to read as
follows:
Sec. 217.2 Definitions.
* * * * *
High volatility commercial real estate (HVCRE) exposure means:
(1) A credit facility secured by land or improved real property
that, prior to being reclassified by the Board-regulated institution as
a non-HVCRE exposure pursuant to paragraph (6) of this definition--
(i) Primarily finances, has financed, or refinances the
acquisition, development, or construction of real property;
(ii) Has the purpose of providing financing to acquire, develop, or
improve such real property into income-producing real property; and
(iii) Is dependent upon future income or sales proceeds from, or
refinancing of, such real property for the repayment of such credit
facility.
(2) An HVCRE exposure does not include a credit facility
financing--
(i) The acquisition, development, or construction of properties
that are--
(A) One- to four-family residential properties. Credit facilities
that do not finance the construction of one- to four-family residential
structures, but instead solely finance improvements such as the laying
of sewers, water pipes, and similar improvements to land, do not
qualify for the one- to four-family residential properties exclusion;
(B) Real property that would qualify as an investment in community
development; or
(C) Agricultural land;
(ii) The acquisition or refinance of existing income-producing real
property secured by a mortgage on such property, if the cash flow being
generated by the real property is sufficient to support the debt
service and expenses of the real property, in accordance with the
Board-regulated institution's applicable loan underwriting criteria for
permanent financings;
[[Page 68033]]
(iii) Improvements to existing income-producing improved real
property secured by a mortgage on such property, if the cash flow being
generated by the real property is sufficient to support the debt
service and expenses of the real property, in accordance with the
Board-regulated institution's applicable loan underwriting criteria for
permanent financings; or
(iv) Commercial real property projects in which--
(A) The loan-to-value ratio is less than or equal to the applicable
maximum supervisory loan-to-value ratio as determined by the Board;
(B) The borrower has contributed capital of at least 15 percent of
the real property's appraised, `as completed' value to the project in
the form of--
(1) Cash;
(2) Unencumbered readily marketable assets;
(3) Paid development expenses out-of-pocket; or
(4) Contributed real property or improvements; and
(C) The borrower contributed the minimum amount of capital
described under paragraph (2)(iv)(B) of this definition before the
Board-regulated institution advances funds (other than the advance of a
nominal sum made in order to secure the Board-regulated institution's
lien against the real property) under the credit facility, and such
minimum amount of capital contributed by the borrower is contractually
required to remain in the project until the HVCRE exposure has been
reclassified by the Board-regulated institution as a non-HVCRE exposure
under paragraph (6) of this definition;
(3) An HVCRE exposure does not include any loan made prior to
January 1, 2015;
(4) An HVCRE exposure does not include a credit facility
reclassified as a non-HVCRE exposure under paragraph (6) of this
definition.
(5) Value of contributed real property: For the purposes of this
definition of HVCRE exposure, the value of any real property
contributed by a borrower as a capital contribution is the appraised
value of the property as determined under standards prescribed pursuant
to section 1110 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (12 U.S.C. 3339), in connection with the
extension of the credit facility or loan to such borrower.
(6) Reclassification as a non-HVCRE exposure: For purposes of this
definition of HVCRE exposure and with respect to a credit facility and
a Board-regulated institution, a Board-regulated institution may
reclassify an HVCRE exposure as a non-HVCRE exposure upon--
(i) The substantial completion of the development or construction
of the real property being financed by the credit facility; and
(ii) Cash flow being generated by the real property being
sufficient to support the debt service and expenses of the real
property, in accordance with the Board-regulated institution's
applicable loan underwriting criteria for permanent financings.
(7) For purposes of this definition, a Board-regulated institution
is not required to reclassify a credit facility that was originated on
or after January 1, 2015 and prior to April 1, 2020.
* * * * *
12 CFR Part 324
FEDERAL DEPOSIT INSURANCE CORPORATION
For the reasons set out in the SUPPLEMENTARY INFORMATION, the FDIC
proposes to amend 12 CFR part 324 as follows.
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
5. The authority citation for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1831bb, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L.
102-233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L.
102-242, 105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108
Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat.
2236, 2386, as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12
U.S.C. 1828 note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C.
78o-7 note); Pub. L. 115-174, 132 Stat. 1296.
Subpart A--General Provisions
0
6. Section 324.2 is amended by revising the definition of a ``high
volatility commercial real estate (HVCRE) exposure'' to read as
follows:
Sec. 324.2 Definitions.
* * * * *
High volatility commercial real estate (HVCRE) exposure means:
(1) A credit facility secured by land or improved real property
that, prior to being reclassified by the FDIC-supervised institution as
a non-HVCRE exposure pursuant to paragraph (6) of this definition--
(i) Primarily finances, has financed, or refinances the
acquisition, development, or construction of real property;
(ii) Has the purpose of providing financing to acquire, develop, or
improve such real property into income-producing real property; and
(iii) Is dependent upon future income or sales proceeds from, or
refinancing of, such real property for the repayment of such credit
facility.
(2) An HVCRE exposure does not include a credit facility
financing--
(i) The acquisition, development, or construction of properties
that are--
(A) One- to four-family residential properties. Credit facilities
that do not finance the construction of one- to four-family residential
structures, but instead solely finance improvements such as the laying
of sewers, water pipes, and similar improvements to land, do not
qualify for the one- to four-family residential properties exclusion;
(B) Real property that would qualify as an investment in community
development; or
(C) Agricultural land;
(ii) The acquisition or refinance of existing income-producing real
property secured by a mortgage on such property, if the cash flow being
generated by the real property is sufficient to support the debt
service and expenses of the real property, in accordance with the FDIC-
supervised institution's applicable loan underwriting criteria for
permanent financings;
(iii) Improvements to existing income-producing improved real
property secured by a mortgage on such property, if the cash flow being
generated by the real property is sufficient to support the debt
service and expenses of the real property, in accordance with the FDIC-
supervised institution's applicable loan underwriting criteria for
permanent financings; or
(iv) Commercial real property projects in which--
(A) The loan-to-value ratio is less than or equal to the applicable
maximum supervisory loan-to-value ratio as determined by the FDIC;
(B) The borrower has contributed capital of at least 15 percent of
the real property's appraised, `as completed' value to the project in
the form of--
(1) Cash;
(2) Unencumbered readily marketable assets;
(3) Paid development expenses out-of-pocket; or
(4) Contributed real property or improvements; and
(C) The borrower contributed the minimum amount of capital
described under paragraph (2)(iv)(B) of this definition before the
FDIC-supervised institution advances funds (other than the advance of a
nominal sum made in order to secure the FDIC-supervised institution's
lien against the real property) under the credit facility, and
[[Page 68034]]
such minimum amount of capital contributed by the borrower is
contractually required to remain in the project until the HVCRE
exposure has been reclassified by the FDIC-supervised institution as a
non-HVCRE exposure under paragraph (6) of this definition;
(3) An HVCRE exposure does not include any loan made prior to
January 1, 2015;
(4) An HVCRE exposure does not include a credit facility
reclassified as a non-HVCRE exposure under paragraph (6) of this
definition.
(5) Value Of contributed real property: For the purposes of this
HVCRE exposure definition, the value of any real property contributed
by a borrower as a capital contribution is the appraised value of the
property as determined under standards prescribed pursuant to section
1110 of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (12 U.S.C. 3339), in connection with the extension of the
credit facility or loan to such borrower.
(6) Reclassification as a non-HVCRE exposure: For purposes of this
HVCRE exposure definition and with respect to a credit facility and an
FDIC-supervised institution, an FDIC-supervised institution may
reclassify an HVCRE exposure as a non-HVCRE exposure upon--
(i) The substantial completion of the development or construction
of the real property being financed by the credit facility; and
(ii) Cash flow being generated by the real property being
sufficient to support the debt service and expenses of the real
property, in accordance with the FDIC-supervised institution's
applicable loan underwriting criteria for permanent financings.
(7) For purposes of this definition, an FDIC-supervised institution
is not required to reclassify a credit facility that was originated on
or after January 1, 2015 and prior to April 1, 2020.
* * * * *
Dated: November 18, 2019.
Morris R. Morgan,
First Deputy Comptroller, Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, November 19, 2019.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on November 19, 2019.
Annmarie H. Boyd,
Assistant Executive Secretary.
[FR Doc. 2019-26544 Filed 12-12-19; 8:45 am]
BILLING CODE 4810-33-P 6210-01-P; 6714-01-P