[Federal Register Volume 86, Number 120 (Friday, June 25, 2021)]
[Proposed Rules]
[Pages 33570-33574]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-12973]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 365

RIN 3064-AF72


Real Estate Lending Standards

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The FDIC is inviting comment on a proposed rule to amend 
Interagency Guidelines for Real Estate Lending Policies (Real Estate 
Lending Standards). The purpose of the proposed rule is to align the 
Real Estate Lending Standards with the community bank leverage ratio 
(CBLR) rule, which does not require electing institutions to calculate 
tier 2 capital or total capital. The proposed rule would allow a 
consistent approach for calculating the ratio of loans in excess of the 
supervisory loan-to-value limits (LTV Limits) at all FDIC-supervised 
institutions, using a methodology that approximates the historical 
methodology the FDIC has followed for calculating this measurement 
without requiring institutions to calculate tier 2 capital. The 
proposed rule would also avoid any regulatory burden that could arise 
if an FDIC-supervised institution subsequently decides to switch 
between different capital frameworks.

DATES: Comments must be received by July 26, 2021.

ADDRESSES: Interested parties are encouraged to submit written 
comments. Commenters should use the title ``Real Estate Lending 
Standards (RIN 3064-AF72)'' to facilitate the organization of comments. 
Interested parties are invited to submit written comments, identified 
by RIN 3064-AF72, by any of the following methods:
     FDIC website: https://www.fdic.gov/resources/regulations/federal-register-publications/.
     Mail: James P. Sheesley, Assistant Executive Secretary, 
Attention: Comments/Legal ESS (RIN 3064-AF72), Federal Deposit 
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
     Hand Delivery/Courier: The guard station at the rear of 
the 550 17th Street NW, building (located on F Street) on business days 
between 7:00 a.m. and 5:00 p.m.
     Email: [email protected]. Comments submitted must include 
``RIN 3064-AF72.''
    Please include your name, affiliation, address, email address, and 
telephone number(s) in your comment. All statements received, including 
attachments and other supporting materials, are part of the public 
record and are subject to public disclosure. You should submit only 
information that you wish to make publicly available.
    Please note: All comments received will be posted generally without 
change to https://www.fdic.gov/resources/regulations/federal-register-publications/, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: 
    Alicia R. Marks, Examination Specialist, Division of Risk 
Management and Supervision, (202) 898-6660, [email protected]; Navid K. 
Choudhury, Counsel, (202) 898-6526, or Catherine S. Wood, Counsel, 
(202) 898-3788, Federal Deposit Insurance Corporation, 550 17th Street 
NW, Washington, DC 20429. For the hearing impaired only, TDD users may 
contact (202) 925-4618.

[[Page 33571]]


SUPPLEMENTARY INFORMATION:

I. Policy Objectives

    The policy objective of the proposed rule is to provide consistent 
calculations of the ratios of loans in excess of the supervisory LTV 
Limits between banking organizations that elect, and those that do not 
elect, to adopt the CBLR framework, while not including capital ratios 
that some institutions are not required to compute or report. The 
proposed rule would amend the Real Estate Lending Standards set forth 
in Appendix A of 12 CFR part 365.
    Section 201 of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA) directs the FDIC, the Board of Governors of 
the Federal Reserve System (FRB), and the Office of the Comptroller of 
the Currency (OCC) (collectively, the agencies) to develop a community 
bank leverage ratio for qualifying community banking organizations. The 
CBLR framework is intended to simplify regulatory capital requirements 
and provide material regulatory compliance burden relief to the 
qualifying community banking organizations that opt into it. In 
particular, banking organizations that opt into the CBLR framework do 
not have to calculate the metrics associated with the applicable risk-
based capital requirements in the agencies' capital rules (generally 
applicable rule), including total capital.
    The Real Estate Lending Standards set forth in Appendix A of 12 CFR 
part 365, as they apply to FDIC-supervised banks, contain a tier 1 
capital threshold for institutions electing to adopt the CBLR and a 
total capital threshold for other banks. The proposed rule would 
provide a consistent treatment for all FDIC-supervised banks without 
requiring the computation of total capital. The proposed amendment is 
described in more detail in Section III, below.

II. Background

    The Real Estate Lending Standards, which were issued pursuant to 
section 304 of the Federal Deposit Insurance Corporation Improvement 
Act of 1991, 12 U.S.C. 1828(o), prescribe standards for real estate 
lending to be used by FDIC-supervised institutions in adopting internal 
real estate lending policies. Section 201 of the EGRRCPA amended 
provisions in the Dodd-Frank Wall Street Reform and Consumer Protection 
Act relative to the capital rules administered by the agencies. The 
CBLR rule was issued by the agencies to implement section 201 of the 
EGRRCPA, and it provides a simple measure of capital adequacy for 
community banking organizations that meet certain qualifying 
criteria.\1\ The FDIC is issuing this proposal to amend part 365 in 
response to changes in the type of capital information available after 
the implementation of the CBLR rule. Qualifying community banking 
organizations \2\ that elect to use the CBLR framework (Electing CBOs) 
may calculate their CBLR without calculating tier 2 capital, and are 
therefore not required to calculate or report tier 2 capital or total 
capital.\3\ The proposed revision to the Real Estate Lending Standards 
would allow a consistent approach for calculating loans in excess of 
the supervisory LTV Limits without having to calculate tier 2 or total 
capital as currently included in part 365 and its Appendix.
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    \1\ 85 FR 64003 (Oct. 9, 2020).
    \2\ The FDIC's CBLR rule defines qualifying community banking 
organizations as ``an FDIC-supervised institution that is not an 
advanced approaches FDIC-supervised institution'' with less than $10 
billion in total consolidated assets that meet other qualifying 
criteria, including a leverage ratio (equal to tier 1 capital 
divided by average total consolidated assets) of greater than 9 
percent. 12 CFR 324.12(a)(2).
    \3\ Total capital is defined as the sum of tier 1 capital and 
tier 2 capital. See 12 CFR 324.2.
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    The proposal would also ensure that the FDIC's regulation regarding 
supervisory LTV Limits is consistent with how examiners are calculating 
credit concentrations, as provided by a statement issued by the 
agencies on March 30, 2020. The statement provided that the agencies' 
examiners will use tier 1 capital plus the appropriate allowance for 
credit losses as the denominator when calculating credit 
concentrations.\4\
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    \4\ See the Joint Statement on Adjustment to the Calculation for 
Credit Concentration Ratios (FIL-31-2020).
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III. Revisions to the Real Estate Lending Standards

    The FDIC is proposing to amend the Real Estate Lending Standards so 
all FDIC-supervised institutions, both Electing CBOs and other insured 
financial institutions, would calculate the ratio of loans in excess of 
the supervisory LTV Limits using tier 1 capital plus the appropriate 
allowance for credit losses \5\ in the denominator. The proposed 
amendment would provide a consistent approach for calculating the ratio 
of loans in excess of the supervisory LTV Limits for all FDIC-
supervised institutions. The proposed amendment would also approximate 
the historical methodology specified in the Real Estate Lending 
Standards for calculating the loans in excess of the supervisory LTV 
Limits without creating any regulatory burden for Electing CBOs and 
other banking organizations.\6\ Further, the FDIC is proposing this 
approach to provide regulatory clarity and avoid any regulatory burden 
that could arise if Electing CBOs subsequently decide to switch between 
the CBLR framework and the generally applicable capital rules. The FDIC 
is proposing to amend the Real Estate Lending Standards only relative 
to the calculation of loans in excess of the supervisory LTV Limits due 
to the change in the type of capital information that will be 
available, and is not considering any revisions to other sections of 
the Real Estate Lending Standards. Additionally, due to a publishing 
error which excluded the third paragraph in this section in the Code of 
Federal Regulations in prior versions, the FDIC is including the 
complete text of the section on loans in excess of the supervisory 
loan-to-value limits.
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    \5\ Banking organizations that have not adopted the current 
expected credit losses (CECL) methodology will use tier 1 capital 
plus the allowance for loan and lease losses (ALLL) as the 
denominator. Banking organizations that have adopted the CECL 
methodology will use tier 1 capital plus the portion of the 
allowance for credit losses (ACL) attributable to loans and leases.
    \6\ The proposed amendment approximates the historical 
methodology in the sense that both the proposed and historical 
approach for calculating the ratio of loans in excess of the LTV 
Limits involve adding a measure of loss absorbing capacity to tier 1 
capital, and an institution's ALLL (or ACL) is a component of tier 2 
capital. Under the agencies' capital rules an institution's entire 
amount of ALLL or ACL could be included in its tier 2 capital, 
depending on the amount of its risk-weighted assets base. Based on 
December 31, 2019, Call Report data--the last Call Report date prior 
to the introduction of the CBLR framework--96.0 percent of FDIC-
supervised institutions reported that their entire ALLL or ACL was 
included in their tier 2 capital, and 50.5 percent reported that 
their tier 2 capital was entirely composed of their ALLL.
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IV. Expected Effects

    As of September 30, 2020, the FDIC supervises 3,245 insured 
depository institutions. The proposed revision to the Real Estate 
Lending Standards, if adopted, would apply to all FDIC-supervised 
institutions. The effect of the proposed revisions at an individual 
bank would depend on whether the amount of its current or future real 
estate loans with loan-to-value ratios that exceed the supervisory LTV 
thresholds is greater than, or less than, the sum of its tier 1 capital 
and allowance (or credit reserve in the case of CECL adopters) for loan 
and lease losses. Allowance levels, credit reserves, and the volume of 
real estate loans and their loan to value ratios can vary considerably 
over time. Moreover, the FDIC does not have comprehensive information 
about the distribution of current loan to value ratios. For these

[[Page 33572]]

reasons, it is not possible to identify how many institutions have real 
estate loans that exceed the supervisory LTV thresholds that would be 
directly implicated by either the current Real Estate Lending Standards 
or the proposed revisions.
    Currently, 3,080 FDIC supervised institutions have total real 
estate loans that exceed the tier 1 capital plus allowance or reserve 
benchmark in the proposed revision and are thus potentially affected by 
the proposed revisions depending on the distribution of their loan to 
value ratios. In comparison, 3,088 FDIC supervised institutions have 
total real estate loans exceeding the current total capital benchmark 
and are thus potentially affected by the current Real Estate Lending 
Standards. As described in more detail below, the population of banks 
potentially subject to the Real Estate Lending Standards is therefore 
almost unchanged by these proposed revisions, and their substantive 
effects are likely to be minimal.\7\
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    \7\ September 30, 2020, Call Report data.
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    The FDIC believes that a threshold of ``tier 1 capital plus an 
allowance for credit losses'' is consistent with the way the FDIC and 
institutions historically have applied the Real Estate Lending 
Standards. Also, the typical (or median) FDIC-supervised institution 
that had not elected the CBLR framework reported no difference between 
the amount of its allowance for credit losses and its tier 2 
capital.\8\ Consequently, although the FDIC does not have information 
about the amount of real estate loans at each institution that 
currently exceeds, or could exceed, the supervisory LTV limits, the 
FDIC does not expect the proposed rule to have material effects on the 
safety-and-soundness of, or compliance costs incurred by, FDIC-
supervised institutions.
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    \8\ September 30, 2020, Call Report data.
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V. Alternatives

    The FDIC considered two alternatives, however it believes that none 
are preferable to the proposal. The alternatives are discussed below.
    First, the FDIC considered making no change to its Real Estate 
Lending Standards. The FDIC is not in favor of this approach because 
the FDIC does not favor an approach in which some banks use a tier 1 
capital threshold and other banks use a total capital threshold, and 
because the existing provision could be confusing for institutions.
    Second, the FDIC considered revising its Real Estate Lending 
Standards so that both Electing CBOs and other institutions would use 
tier 1 capital in place of total capital for the purpose of calculating 
the supervisory LTV Limits. While this would subject both Electing CBOs 
and other institutions to the same approach, because the amount of tier 
1 capital at an institution is typically less than the amount of total 
capital, this alternative would result in a relative tightening of the 
supervisory standards with respect to loans made in excess of the 
supervisory LTV Limits. The FDIC believes that the general level of the 
current supervisory LTV Limits, which would be retained by this 
proposed rule, is appropriately reflective of the safety and soundness 
risk of depository institutions, and therefore the FDIC does not 
consider this alternative preferable to the proposed rule.

VI. Request for Comments

    The FDIC invites comment on all aspects of the proposed rule. In 
particular, the FDIC invites comment on the use of tier 1 capital plus 
the appropriate allowance for credit losses in the denominator to 
calculate the level of loans in excess of the supervisory LTV Limits. 
Additionally, what alternative capital metric for the denominator when 
calculating loans in excess of the supervisory LTV Limits should the 
FDIC consider?

IV. Regulatory Analysis

A. Proposed Waiver of Delayed Effective Date

    The FDIC proposes to make all provisions of the rule effective upon 
publication of the final rule in the Federal Register. The 
Administrative Procedure Act (APA) allows for an effective date of less 
than 30 days after publication ``as otherwise provided by the agency 
for good cause found and published with the rule.'' \9\ The purpose of 
the 30-day waiting period prescribed in APA section 553(d)(3) is to 
give affected parties a reasonable time to adjust their behavior and 
prepare before the final rule takes effect. The FDIC believes that this 
waiting period would be unnecessary as the proposed rule, if codified, 
would likely lift burdens on FDIC-supervised institutions by allowing 
them to calculate the ratio of loans in excess of the supervisory LTV 
Limits without calculating tier 2 capital, and would also ensure that 
the approach is consistent, regardless of the institutions' CBLR 
election status. Consequently, the FDIC believes it would have good 
cause for the final rule to become effective upon publication.
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    \9\ 5 U.S.C. 553(d)(3).
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    The FDIC invites comment on whether good cause exists to waive the 
delayed effective date of the rule once finalized.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a proposed rule, an agency prepare and make available 
for public comment an initial regulatory flexibility analysis that 
describes the impact of the proposed rule on small entities.\10\ 
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, and publishes its 
certification and a short explanatory statement in the Federal Register 
together with the rule. The Small Business Administration (SBA) has 
defined ``small entities'' to include banking organizations with total 
assets of less than or equal to $600 million.\11\ 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 noninterest expenses. The FDIC believes that effects 
in excess of these thresholds typically represent significant effects 
for FDIC-supervised institutions. For the reasons provided below, the 
FDIC certifies that the proposed rule will not have a significant 
economic impact on a substantial number of small banking organizations. 
Accordingly, a regulatory flexibility analysis is not required.
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    \10\ 5 U.S.C. 601 et seq.
    \11\ The SBA defines a small banking organization as having $600 
million or less in assets, where ``a financial institution's assets 
are determined by averaging the assets reported on its four 
quarterly financial statements for the preceding year.'' 13 CFR 
121.201 n.8 (2019). ``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. . . .'' 13 CFR 121.103(a)(6) 
(2019). 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.
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    As of September 30, 2020, the FDIC supervised 3,245 institutions, 
of which 2,434 were ``small entities'' for purposes of the RFA.\12\ The 
effect of the proposed revisions at an individual bank would depend on 
whether the amount of its current or future real estate loans with 
loan-to-value ratios that exceed the supervisory LTV thresholds is 
greater than, or less than, the sum of its tier 1 capital and allowance 
(or credit reserve in the case of CECL adopters) for loan and lease 
losses. Allowance levels, credit reserves, and the volume of real 
estate loans and their loan to value ratios can vary considerably over 
time. Moreover, the FDIC does not have

[[Page 33573]]

comprehensive information about the distribution of current loan to 
value ratios. For these reasons, it is not possible to identify how 
many institutions have real estate loans that exceed the supervisory 
LTV thresholds that would be directly implicated by either the current 
Guidelines or the proposed revisions.
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    \12\ September 30, 2020, Call Report data.
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    Currently, 2,305 small, FDIC supervised institutions have total 
real estate loans that exceed the tier 1 capital plus allowance or 
reserve benchmark in the proposed revision and are thus potentially 
affected by the proposed revisions depending on the distribution of 
their loan to value ratios. In comparison, 2,312 small, FDIC supervised 
institutions have total real estate loans exceeding the current total 
capital benchmark and are thus potentially affected by the current Real 
Estate Lending Standards. As described in more detail below, the 
population of banks potentially subject to the Real Estate Lending 
Standards is therefore almost unchanged by these proposed revisions, 
and their substantive effects are likely to be minimal.\13\
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    \13\ Id.
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    The FDIC believes that a threshold of ``tier 1 capital plus an 
allowance for credit losses'' is consistent with the way the FDIC and 
institutions historically have applied the Real Estate Lending 
Standards. Also, the typical (or median) small, FDIC-supervised 
institution that had not elected the CBLR framework reported no 
difference between the amount of its allowance for credit losses and 
its tier 2 capital.\14\ Consequently, although the FDIC does not have 
information about the amount of real estate loans at each small 
institution that currently exceeds, or could exceed, the supervisory 
LTV limits, the FDIC does not expect the proposed rule to have material 
effects on the safety-and-soundness of, or compliance costs incurred 
by, small FDIC-supervised institutions. However, small institutions may 
have to incur some costs associated with making the necessary changes 
to their systems and processes in order to comply with the terms of the 
proposed rule. The FDIC believes that any such costs are likely to be 
minimal given that all small institutions already calculate tier 1 
capital and the allowance for credit losses and had been subject to the 
previous thresholds for many years before the changes in the capital 
rules.
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    \14\ Id.
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    Therefore, and based on the preceding discussion, the FDIC 
certifies that the proposed rule, if codified as written, would not 
significantly affect a substantial number of small entities.
    The FDIC invites comments on all aspects of the supporting 
information provided in this section, and in particular, whether the 
proposed rule would have any significant effects on small entities that 
the FDIC has not identified.

C. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (PRA),\15\ the FDIC may not conduct or sponsor, and a 
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 FDIC has reviewed this proposed rule and 
determined that it would not introduce any new or revise any collection 
of information pursuant to the PRA. Therefore, no submissions will be 
made to OMB with respect to this proposed rule.
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    \15\ 44 U.S.C. 3501-3521.
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D. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\16\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
insured depository institution, 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.\17\
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    \16\ 12 U.S.C. 4802(a).
    \17\ Id. at 4802(b).
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    The FDIC believes that this proposed rule, if implemented, would 
not impose new reporting, disclosure, or other requirements, and would 
likely instead reduce such burdens by allowing Electing CBOs to avoid 
calculating and reporting tier 2 capital, as would be required under 
the current Real Estate Lending Standards. Additionally, even if this 
proposed rule could be considered subject to the requirements of 
section 302(b) of RCDRIA, the FDIC believes that there is good cause 
under section 302(b)(1)(A) to have the rule become effective upon 
publication in the Federal Register for the same reasons that it 
believes good cause exists under the APA (see Proposed Waiver of 
Delayed Effective Date, supra). The FDIC invites comment on the 
applicability of section 302(b) of RCDRIA to the proposed rule and, if 
it is applicable, whether good cause exists to waive the delayed 
effective date of the rule once finalized.

E. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \18\ requires the Federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The FDIC has sought to present the 
proposed rule in a simple and straightforward manner and invites 
comment on the use of plain language.
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    \18\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
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List of Subjects in 12 CFR Part 365

    Banks, Banking, Mortgages, Savings associations.

PART 365--REAL ESTATE LENDING STANDARDS

Authority and Issuance

    For the reasons stated in the preamble, the Federal Deposit 
Insurance Corporation proposes to amend part 365 of chapter III of 
title 12 of the Code of Federal Regulations as follows:

0
1. The authority citation for part 365 continues to read as follows:

    Authority: 12 U.S.C. 1828(o) and 5101 et seq.

0
2. Amend Appendix A to Subpart A by revising the section titled ``Loans 
in Excess of the Supervisory Loan-to-Value Limits'' to read as follows:

Appendix A to Subpart A of Part 365--Interagency Guidelines for Real 
Estate Lending Policies

* * * * *

Loans in Excess of the Supervisory Loan-to-Value Limits

    The agencies recognize that appropriate loan-to-value limits 
vary not only among categories of real estate loans but also among 
individual loans. Therefore, it may be appropriate in individual 
cases to originate or purchase loans with loan-to-value ratios in 
excess of the supervisory loan-to-value limits, based on the support 
provided by other credit factors. Such loans should be identified in 
the institution's records, and

[[Page 33574]]

their aggregate amount reported at least quarterly to the 
institution's board of directors. (See additional reporting 
requirements described under ``Exceptions to the General Policy.'')
    The aggregate amount of all loans in excess of the supervisory 
loan-to-value limits should not exceed 100 percent of total 
capital.\4\ Moreover, within the aggregate limit, total loans for 
all commercial, agricultural, multifamily or other non-1-to-4 family 
residential properties should not exceed 30 percent of total 
capital. An institution will come under increased supervisory 
scrutiny as the total of such loans approaches these levels.
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    \4\ For the purposes of these Guidelines, for state non-member 
banks and state savings associations, ``total capital'' refers to 
the FDIC-supervised institution's tier 1 capital, as defined in 
Sec.  324.2 of this chapter, plus the allowance for loan and leases 
losses or the allowance for credit losses attributable to loans and 
leases, as applicable. The allowance for credit losses attributable 
to loans and leases is applicable for institutions that have adopted 
the Current Expected Credit Losses methodology.
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    In determining the aggregate amount of such loans, institutions 
should: (a) Include all loans secured by the same property if any 
one of those loans exceeds the supervisory loan-to-value limits; and 
(b) include the recourse obligation of any such loan sold with 
recourse. Conversely, a loan should no longer be reported to the 
directors as part of aggregate totals when reduction in principal or 
senior liens, or additional contribution of collateral or equity 
(e.g., improvements to the real property securing the loan), bring 
the loan-to-value ratio into compliance with supervisory limits.
* * * * *

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on June 15, 2021.
James P. Sheesley,
Assistant Executive Secretary.

[FR Doc. 2021-12973 Filed 6-24-21; 8:45 am]
BILLING CODE 6714-01-P