[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]



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 Rules and Regulations
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  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.

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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.
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    \1\ Public Law 115-174, 132 Stat. 1296 (2018).
    \2\ See 12 U.S.C. 1831bb.
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    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.
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    \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.
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    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.
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    \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).
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    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\
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    \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).
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    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\
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    \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.
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    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\
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    \12\ See 84 FR 4131 (February 14, 2019).
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    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.
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    \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.
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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\
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    \14\ See 12 CFR 217.131 (Board); 12 CFR 3.131 (OCC); 12 CFR 
324.131 (FDIC).
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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.''
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    \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).
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    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.
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    \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).
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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