[Federal Register Volume 86, Number 163 (Thursday, August 26, 2021)]
[Proposed Rules]
[Pages 47601-47608]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17560]
=======================================================================
-----------------------------------------------------------------------
FARM CREDIT ADMINISTRATION
12 CFR Part 628
RIN 3052-AD42
Risk Weighting of High Volatility Commercial Real Estate (HVCRE)
Exposures
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA, we, or our) is seeking
comments on this proposed rule that would revise our regulatory capital
requirements for Farm Credit System (FCS or System) institutions to
define and establish risk-weightings for High Volatility Commercial
Real Estate (HVCRE) exposures.
DATES: Please send us your comments on or before November 24, 2021.
ADDRESSES: For accuracy and efficiency reasons, please submit comments
by email or through FCA's website. We do not accept comments submitted
by facsimiles (fax), as faxes are difficult for us to process and
achieve compliance with section 508 of the Rehabilitation Act of 1973.
Please do not submit your comment multiple times via different methods.
You may submit comments by any of the following methods:
Email: Send us an email at [email protected].
FCA Website: http://www.fca.gov. Click inside the ``I want
to. . .'' field near the top of the page; select ``comment on a pending
regulation'' from the dropdown menu; and click ``Go.'' This takes you
to an electronic public comment form.
Mail: Kevin J. Kramp, Director, Office of Regulatory
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA
22102-5090.
You may review copies of comments we receive on our website at
http://www.fca.gov. Once you are on the website, click inside the ``I
want to. . .'' field near the top of the page; select ``find comments
on a pending regulation'' from the dropdown menu; and click ``Go.''
This will take you to the Comment Letters page where you can select the
regulation for which you would like to read the public comments.
We will show your comments as submitted, including any supporting
data provided, but for technical reasons we may omit items such as
logos and special characters. Identifying information that you provide,
such as phone numbers and addresses, will be publicly available.
However, we will attempt to remove email addresses to help reduce
internet spam. You may also review comments at our office in McLean,
Virginia. Please call us at (703) 883-4056 or email us at [email protected] to make an appointment.
FOR FURTHER INFORMATION CONTACT:
Technical information: Ryan Leist, [email protected], Senior
Accountant, or Jeremy R. Edelstein, [email protected], Associate
Director, Finance and Capital Markets Team, Office of Regulatory
Policy, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4414, TTY (703) 883-4056 or [email protected]; or
[[Page 47602]]
Legal information: Jennifer Cohn, [email protected], Senior Counsel,
Office of General Counsel, Farm Credit Administration, McLean, VA
22102-5090, (720) 213-0440, TTY (703) 883-4056.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Objectives of the Proposed Rule
B. Background
II. Proposed Rule
A. Scope of HVCRE Exposure Definition
B. Exclusions From HVCRE Exposure Definition
1. One- to Four-Family Residential Properties
2. Agricultural Land
3. Loans on Existing Income Producing Properties That Qualify as
Permanent Financings
4. Certain Commercial Real Property Projects
a. Loan-to-Value Limits
b. Contributed Capital
c. Value Appraisal
d. Project
5. Reclassification as a Non-HVCRE Exposure
6. Applicability Only to Loans Made After Effective Date
C. Impact on Prior FCA Board Actions
III. Regulatory Flexibility Act Analysis
I. Introduction
A. Objectives of the Proposed Rule
The FCA's objectives in proposing this rule are to:
Update capital requirements to reflect the increased risks
that exposures to certain acquisition, development or construction
loans pose to System institutions; and
Ensure that the System's capital requirements are
comparable to the Basel III framework and the standardized approach the
Federal banking regulatory agencies have adopted, with deviations as
appropriate to accommodate the different operational and credit
considerations of the System.
B. Background
In October 2013 and April 2014, the Federal banking regulatory
agencies (FBRAs) \1\ published in the Federal Register capital rules
governing the banking organizations they regulate.\2\ Those rules
follow the Basel Committee on Banking Supervision's (BCBS or Basel
Committee) document entitled ``Basel III: A Global Regulatory Framework
for More Resilient Banks and Banking Systems'' (Basel III), including
subsequent changes to the BCBS's capital standards and BCBS
consultative papers.\3\
---------------------------------------------------------------------------
\1\ The FBRAs are the Office of the Comptroller of the Currency
(OCC), the Board of Governors of the Federal Reserve System (FRB),
and the Federal Deposit Insurance Corporation (FDIC).
\2\ 78 FR 62018 (October 11, 2013) (final rule of the OCC and
the FRB); 79 FR 20754 (April 14, 2014) (final rule of the FDIC).
\3\ Basel III was published in December 2010 and revised in June
2011. The text is available at http://www.bis.org/publ/bcbs189.htm.
The BCBS was established in 1974 by central banks with bank
supervisory authorities in major industrial countries. The BCBS
develops banking guidelines and recommends them for adoption by
member countries and others. BCBS documents are available at http://www.bis.org. The FCA does not have representation on the Basel
Committee as the FBRAs do.
---------------------------------------------------------------------------
On September 4, 2014, FCA published in the Federal Register a
notice of proposed rulemaking seeking public comment on revisions to
our regulatory capital requirements.\4\ Our proposed rule was
comparable to the final rule of the FBRAs and the Basel III framework,
while taking into account the cooperative structure and the
organization of the System. Beginning in 2010, System institutions had
sought for FCA to adopt a capital framework that was as similar as
possible to the capital guidelines of the FBRAs as revised to implement
the Basel III standards. In particular, System institutions had
asserted that consistency of FCA capital requirements with those of the
FBRAs would allow investors, shareholders, and others to better
understand the financial strength and risk-bearing capacity of the
System.\5\
---------------------------------------------------------------------------
\4\ 79 FR 52814.
\5\ See 79 FR 52814, 52820. FCA is not required by law to follow
the Basel Committee standards.
---------------------------------------------------------------------------
Included in the provisions we proposed to adopt was a 150 percent
risk-weight for HVCRE exposures. Our proposed definition of HVCRE was
very similar to the definition the FBRAs had adopted at the time.
System commenters expressed concern about parts of the proposed HVCRE
definition and asked us not to adopt the definition. We did not adopt
the HVCRE provisions when we adopted our final capital rules because we
wanted to further consider and analyze HVCRE.\6\ In the preamble to the
final capital rule, we said that we expected to engage in additional
HVCRE rulemaking in the future.\7\
---------------------------------------------------------------------------
\6\ 81 FR 49719, 49736 (July 28, 2016).
\7\ See supra footnote 6.
---------------------------------------------------------------------------
Beginning in 2017, the FBRAs issued several proposed rules on HVCRE
exposures, in an effort to address concerns with the original
definition.\8\ On May 24, 2018, the Economic Growth, Regulatory Relief,
and Consumer Protection Act (EGRRCPA) \9\ was enacted, adding a new
statutory definition that would have to be satisfied for an exposure to
be risk-weighted as an HVCRE exposure. On December 13, 2019, the FBRAs
published a final rule, which became effective on April 1, 2020,
implementing the EGRRCPA requirements.\10\
---------------------------------------------------------------------------
\8\ FCA staff submitted a comment letter in response to one of
the proposals that communicated our concerns with a proposed
exemption for agricultural land.
\9\ Public Law 115-174, 132 Stat. 1296 (2018).
\10\ 84 FR 68019.
---------------------------------------------------------------------------
Many of the provisions in the FBRAs' final rule address the
concerns commenters raised in response to the FCA's 2014 proposed rule.
Accordingly, to ensure that System institutions continue to hold enough
regulatory capital to fulfill their mission as a Government-sponsored
enterprise, we propose provisions that are, in general, similar to the
FBRA provisions. However, we propose differences in two general areas.
First, in their rule the FBRAs clarified the interpretation of certain
terms generally to be consistent with their usage in other FBRA
regulations or Call Report instructions; while we do not propose
different interpretations of these terms, we do not propose to refer to
these FBRA references, as we do not believe that is appropriate in our
rules. Second, we propose some differences where appropriate to
accommodate the different operational and credit considerations of the
System, while continuing to maintain appropriate safety and soundness.
II. Proposed Rule
Because of the increased risk in exposures that fall within the
definition of HVCRE exposures, we propose, consistent with the FBRAs,
to assign a 150 percent risk-weight to those exposures, rather than the
100 percent risk-weight generally assigned to commercial real estate
and other corporate exposures under FCA regulation Sec. 628.32(f)(1).
As discussed below, our proposed rule is similar to the FBRAs' rule in
most respects. In general, the same loan to the same borrower--whether
it is made by a commercial bank or a System institution--carries the
same risk and should be assigned the same risk-weight. The proposed
definition of HVCRE exposure is intended to capture only those
exposures that have increased risk characteristics in the acquisition,
development, or construction of real property.
As with the risk-weighting provisions of our capital rules
generally, language in the proposed definition of HVCRE exposure that
refers to the financing of certain types of property or projects does
not itself provide authority for an institution to engage in that
financing,
[[Page 47603]]
or to have an exposure to that property or project. This is a risk-
weighting regulation only.\11\ System scope and eligibility authorities
are contained in other provisions of our regulations and in the Farm
Credit Act of 1971, as amended (Act).\12\
---------------------------------------------------------------------------
\11\ As stated in the preamble to the Tier 1/Tier 2 Capital
Framework final rule, ``We remind System institutions that the
presence of a particular risk weighting does not itself provide
authority for a System institution to have an exposure to that asset
or item.'' See 81 FR 49719, 49722 (July 28, 2016).
\12\ There may be overlap between HVCRE exposures and exposures
to land in transition--agricultural land in the path of development.
System institutions contemplating land in transition financing must
review and understand FCA Bookletter BL-058 and must ensure they are
in full compliance with all FCA regulations.
---------------------------------------------------------------------------
A. Scope of HVCRE Exposure Definition
As the FBRAs did, we propose to define an HVCRE exposure as ``a
credit facility secured by land or improved real property'' that meets
three criteria (and that does not meet any of the definition's
exclusions, which are discussed below).\13\ The FBRAs defined this term
in a manner that is consistent with the definition of ``a loan secured
by real estate'' in their Call Report forms and instructions. In that
definition, 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.
---------------------------------------------------------------------------
\13\ FCA regulation Sec. 614.4240(q) defines ``real property''
as ``all interests, benefits, and rights inherent in the ownership
of real estate.''
---------------------------------------------------------------------------
We propose to adopt the same meaning of ``a credit facility secured
by land or improved real property'' as the FBRAs have adopted.
Therefore, for example, if an institution makes a loan to construct and
equip a building, and the loan is secured by both the real estate and
the equipment, the institution must estimate the value of the building,
upon completion, and of the equipment. If the value of the building is
greater than 50 percent of the principal amount of the loan at
origination, the loan would be a ``loan secured by real estate,'' and
it would therefore be a ``credit facility secured by land or improved
real property.'' \14\ If the value of the building, upon completion, is
less than 50 percent of the principal amount of the loan at
origination, it would not be a ``loan secured by real estate,'' and it
would therefore not be a ``credit facility secured by land or improved
real property.'' Accordingly, it would not be an HVCRE exposure.
---------------------------------------------------------------------------
\14\ A determination that a loan is a ``credit facility secured
by land or improved real property'' does not mean that the loan is
necessarily an HVCRE exposure. As mentioned above, a loan also has
to satisfy three criteria, and not be subject to an exclusion, to be
an HVCRE exposure.
---------------------------------------------------------------------------
Under our proposal, a ``credit facility secured by land or improved
real property'' would not be classified as an HVCRE exposure unless it
met the following three criteria. If such a credit facility did not
meet all three criteria, it would not be 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 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 first criterion is that the credit facility must primarily
finance or refinance the acquisition, development, or construction of
real property. This criterion is satisfied if more than 50 percent of
the proposed use of the loan funds is for the acquisition, development,
or construction of real property. The criterion is not satisfied if 50
percent or less of the proposed use of the loan funds is for the
acquisition, development, or construction of real property.
The second criterion is that the credit facility has the purpose of
providing financing to acquire, develop, or improve the real property
into income-producing property.
The third criterion is that the credit facility is dependent for
repayment upon future income or sales proceeds from, or refinancing of,
the real property. This criterion narrows the scope of the definition
of HVCRE exposure from the definition we proposed in 2014. The
definition we proposed in 2014 would have included within the scope of
HVCRE exposures credit facilities for which repayment would be from the
ongoing business of the borrower, as well as credit facilities that
were dependent for repayment upon future income or sales proceeds.
The Farm Credit Council and several System banks and association
commenters expressed concern with the breadth of this definition from
the 2014 proposal.\15\ This proposal addresses that concern, since
credit facilities that will be repaid from the borrower's ongoing
business would not be classified as an HVCRE exposure. We believe that
a majority of System loans are repaid from the borrower's ongoing
business rather than from future income or sales proceeds, and
therefore that a majority of potential System HVCRE exposures would not
meet this criterion and would not be HVCRE exposures.
---------------------------------------------------------------------------
\15\ See e.g., Farm Credit Council comment letter, Regulatory
Capital, Implementation of Tier1/Tier2 Framework, dated February 13,
2015.
---------------------------------------------------------------------------
B. Exclusions From HVCRE Exposure Definition
Under this proposal, the exposures described in the following
paragraphs would be excluded from the definition of HVCRE exposure:
1. One- to Four-Family Residential Properties
Under this proposal, as in the FBRA rule, an HVCRE exposure would
not include a credit facility financing the acquisition, development,
or construction of properties that are one- to four-family residential
properties, provided that the dwelling (including attached components
such as garages, porches, and decks) represents at least 50 percent of
the total appraised value of the collateral secured by the first or
subsequent lien.
Manufactured homes permanently affixed to the underlying property,
when deemed to be real property under state law, would qualify for this
exclusion, as would construction loans secured by single family
dwelling units, duplex units, and townhouses. Condominium and
cooperative construction loans would qualify for this 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 exclusion would apply to all credit
facilities that fall within its scope, whether rural home financing
under Sec. 613.3030 or one- to four-family residential property
financing under Sec. 613.3000(b). Similar to the reduced risk-weight
assigned to residential mortgage exposures under Sec. 628.32(g)(1), a
credit facility would qualify for this exclusion only if the property
securing the credit facility exhibits characteristics of residential
property rather than agricultural property including, but not limited
to, the requirement that the dwelling (including attached components
such as garages, porches, and decks) represents at least 50 percent of
the total appraised value of the collateral secured by the first or
subsequent lien. If examiners determined that the property was not
residential in nature, the credit facility would not qualify for this
exclusion.
Loans for multifamily residential property construction (such as
apartment buildings where loan repayment is dependent upon
[[Page 47604]]
apartment rental income) would not qualify for this exclusion.\16\
---------------------------------------------------------------------------
\16\ See supra footnote 11. Additionally, certain multifamily
residential property may meet the ``other credit needs'' financing
available to eligible borrowers as authorized by sections 1.11(a)(1)
and 2.4(a)(1) of the Act and referenced in Sec. 613.3000.
---------------------------------------------------------------------------
Loans used solely to acquire undeveloped land would not qualify for
this exclusion; the credit facility would also have to include
financing for the construction of one- to four-family residential
structures. Moreover, credit facilities that do not finance the
construction of one- to four-family residential structures (as defined
above), but instead solely finance improvements such as the laying of
sewers, water pipes, and similar improvements to land, would not
qualify for this exclusion. A credit facility that combines the
financing of land development and the construction of one- to four-
family structures would qualify for this exclusion.
2. Agricultural Land
We propose to exclude from the HVCRE definition credit facilities
financing ``agricultural land,'' as defined in FCA regulation Sec.
619.9025, or real estate used as an integral part of an aquatic
operation. Section 619.9025 defines ``agricultural land'' as ``land
improved or unimproved which is devoted to or available for the
production of crops and other products such as but not limited to
fruits and timber or for the raising of livestock.''
This exclusion would apply only to financing for the agricultural
and aquatic needs of bona fide farmers, ranchers, and producers and
harvesters of aquatic products under Sec. 613.3000 of FCA regulations.
It would not apply to loans for farm property construction and land
development purposes.
With one exception, we intend our proposed agricultural land
exclusion to have the same scope as the agricultural land exclusion of
the FBRAs. The FBRAs' definition of agricultural land has the same
meaning as ``farmland'' in their Call Report forms and
instructions.\17\ They define farmland as ``all land known to be used
or usable for agricultural purposes, such as crop and livestock
production. Farmland includes grazing or pastureland, whether tillable
or not and whether wooded or not.'' Loans for farm property
construction and land development purposes are not loans on
``farmland,'' and therefore such loans do not fall within the
agricultural land exclusion. Unlike the FBRAs, we propose to expressly
include within the agricultural land exclusion real estate that is an
integral part of an aquatic operation.
---------------------------------------------------------------------------
\17\ See Federal Financial Institutions Examination Council
(FFIEC) 031 and FFIEC 041--Instructions for Preparation of
Consolidated Reports of Condition and Income.
---------------------------------------------------------------------------
As the FBRAs did in their final rule, loans for land development
purposes and farm property construction would not be eligible in this
proposed rule for the agricultural land exclusion from the HVCRE
exposure definition. Loans made for land development purposes would
include loans made to finance property improvements, such as laying
sewers or water pipes preparatory to erecting new structures. Loans
made for farm property construction would include loans made to finance
the on-site construction of industrial, commercial, residential, or
farm buildings. For the purposes of this exclusion, ``construction''
includes not only construction of new structures, but also additions or
alterations to existing structures and the demolition of existing
structures to make way for new structures.
3. Loans on Existing Income Producing Properties That Qualify as
Permanent Financings
As in the FBRA rule, we propose to exclude from the definition of
HVCRE exposure credit facilities that finance the acquisition or
refinance 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 System institution's underwriting criteria for
permanent loans. We also propose to exclude credit facilities financing
improvements to existing income-producing real property secured by a
mortgage on such property. Examiners may review the reasonableness of a
System institution's underwriting criteria for permanent loans through
the regular examination process to ensure the real estate lending
policies are consistent with safe and sound banking practices.
We believe this income-producing property exclusion would address
certain concerns expressed in comment letters from FCA's 2014 proposed
HVCRE definition regarding agribusiness and rural utility loans. System
institutions commented they did not believe the definition of HVCRE was
intended to include agribusiness or rural project financing
transactions to build processing and marketing facilities or rural
infrastructure. Under this proposal, these types of loans could qualify
for the income-producing property exclusion 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 System
institution's underwriting criteria for permanent loans.
Agribusiness and rural project loans that are not secured by
existing income-producing real property would not fall under this
exclusion. Such loans often pose a greater credit risk than permanent
loans. We believe it is appropriate to classify these loans as HVCRE
exposures and impose a 150 percent risk-weight given their increased
risk compared to other commercial real estate exposures (unless the
loan satisfies one of the other exclusions). However, as discussed in
section 5--Reclassification as a Non-HVCRE Exposure section below, a
System institution would be allowed to reclassify these HVCRE exposures
as a non-HVCRE exposure if two conditions are met:
Substantial completion of the development or construction
on the real property has occurred; and
the cash flow generated by the property covers the debt
service and expenses on the property in accordance with the System
institution's loan underwriting standards for permanent financings.
4. Certain Commercial Real Property Projects
As in the FBRA rule, we propose to exclude from the definition of
HVCRE exposure credit facilities for certain commercial real property
projects that are underwritten in a safe and sound manner in accordance
with proposed loan-to-value (LTV) limits and where the borrower has
contributed a specified amount of capital to the project. A commercial
real property project loan generally is used to acquire, develop,
construct, improve, or refinance real property, and the primary source
of repayment is dependent on the sale of the real property or the
revenues from third-party rent or lease payments. Commercial real
property project loans do not include ordinary business loans and lines
of credit in which real property is taken as collateral. As it relates
to the System, we believe this exclusion is most relevant to
agribusiness (processing and marketing entities and farm-related
businesses) and rural project loans.
In order to qualify for this exclusion, a credit facility that
finances a commercial real property project would be required to meet
four distinct criteria. First, the LTV ratio would have to be less than
or equal to the applicable maximum set forth in proposed Appendix A.
Second, the borrower
[[Page 47605]]
would have to contribute capital of at least 15 percent of the real
property's value to the project. Third, the 15 percent amount of
contributed capital would have to be contributed prior to the
institution's advance of funds (other than a nominal sum to secure the
institution's lien on the real property). Fourth, the 15 percent amount
of contributed capital would have to be contractually required to
remain in the project until the loan could be reclassified as a non-
HVCRE exposure. The proposed interpretations of terms relevant to the
four criteria for this exclusion are discussed below.
a. Loan-to-Value Limits
To qualify for this exclusion from the HVCRE exposure definition,
the FBRAs' rule requires that a credit facility be underwritten in a
safe and sound manner in accordance with the Supervisory Loan-to-Value
Limits contained in the Interagency Guidelines for Real Estate Lending
Policies.\18\ These Interagency Guidelines require banking
institutions, for real estate loans, to establish internal LTV limits
that do not exceed specified supervisory limits ranging from 65 percent
for raw land to 85 percent for 1- to 4-family residential and improved
property.
---------------------------------------------------------------------------
\18\ See 12 CFR part 365, subpart A, Appendix A (FDIC); 12 CFR
part 208, Appendix C (FRB); 12 CFR part 34, Appendix A (OCC).
---------------------------------------------------------------------------
The FCA has not adopted these supervisory LTV limits.\19\
Nevertheless, FCA examination guidance from 2009 makes clear that FCA
expectations are consistent with the Interagency Guidelines, including
the supervisory LTV limits.\20\ We believe exposures should satisfy
these LTV limits to qualify for this exclusion to the HVCRE definition.
We propose to adopt these LTV limits, for the purpose of the HVCRE
definition only, in a new Appendix A to part 628.
---------------------------------------------------------------------------
\19\ Section 1.10(a) of the Act and Sec. 614.4200(b)(1) of FCA
regulations require at least an 85 percent LTV ratio for long-term
real estate mortgage loans that are comprised primarily of
agricultural or rural property, except for loans that have
government guarantees or are covered by private mortgage insurance.
Under Sec. 614.4200(b)(1), agricultural or rural property includes
agricultural land and improvements thereto, a farm-related business,
a marketing or processing operation, a rural residence, or real
estate used as an integral part of an aquatic operation.
\20\ Examination Bulletin FCA 2009-2, Guidance for Evaluating
the Safety and Soundness of FCS Real Estate Lending (focusing on
land in transition), December 2009.
---------------------------------------------------------------------------
b. Contributed Capital
Under the proposal, cash, unencumbered readily marketable assets,
paid development expenses out-of-pocket, and contributed real property
or improvements would count as forms of capital for purposes of the 15
percent capital contribution criterion. A System institution could
consider costs incurred by the project and paid by the borrower prior
to the advance of funds by the System institution as out-of-pocket
development expenses paid by the borrower.
The FBRAs' version of the rule provides that the value of
contributed real property means the appraised value of real property
contributed by the borrower as determined under the standards
prescribed by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (12 U.S.C. 3339) (FIRREA). Because FCA is not
named in FIRREA as one of the Federal financial regulatory agencies
covered by its real estate appraisal provisions, our proposal does not
expressly require that the value must be determined under the FIRREA
standards; rather, we propose to require that the value must be
determined in accordance with FCA regulations at Subpart F of 12 CFR
part 614. FCA's collateral evaluation rules are generally similar,
although not identical, to the FIRREA standards, however, and therefore
there should be few substantive differences in the approach to
valuation.
FCA has long recognized that Congress, through the enactment of
FIRREA, expressed a strong belief that all financial transactions
involving real property collateral should be supported by adequate and
accurate collateral evaluations. Congress also expressed the belief
that such collateral evaluations should be based on standards and
guidelines that are consistently applied by the financial and appraisal
industries. We believe that following the collateral evaluation
requirements of FIRREA and the overarching beliefs of Congress is an
essential element of the safe and sound lending activities covered by
the System. FCA's collateral evaluation regulations, at 12 CFR part
614, subpart F, are generally similar, although not identical, to the
FIRREA appraisal requirements.\21\
---------------------------------------------------------------------------
\21\ See FCA Informational Memorandum, Guidance on Addressing
Personal and Intangible Property within Collateral Evaluation
Policies and Procedures (Sec. 614.4245), August 29, 2016; FCA
Examination Manual EM-22.6, Loan Portfolio Management: Collateral
Risk management, dated August 20, 2014.
---------------------------------------------------------------------------
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.
To ensure that tangible equity is invested in the project, funds
borrowed from a third party (such as another lender, an owner or parent
organization, or a related party) could count toward the capital
contribution as long as the borrowed funds are not derived from,
related to, or encumber any collateral that has been contributed to the
project. Additionally, the recognition of any contribution of funds to
a project would have to be in conformance with safe and sound lending
practices and in accordance with the System institution's underwriting
criteria and internal policies.
In addition, contributed property or improvements would have to be
directly related to the project to be eligible to count towards the
capital contribution. Real estate not developed as part of the project
would not be counted toward the capital contribution.
We would interpret the term ``unencumbered readily marketable
assets'' to mean insured deposits, financial instruments, and bullion
in which the System institution has a perfected interest. For
collateral to be considered ``readily marketable'' by a System
institution, the institution'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.\22\ Readily marketable
collateral should be appropriately discounted by the institution
consistent with the institution's usual practices for making loans
secured by such collateral. Examiners may review the reasonableness of
a System institution's underwriting criteria to ensure the real estate
lending policies are consistent with safe and sound banking practices.
---------------------------------------------------------------------------
\22\ This interpretation is consistent with the definitions of
``unencumbered'' and ``marketable'' in Sec. 615.5134 of our
regulations.
---------------------------------------------------------------------------
c. Value Appraisal
Under the proposal, the 15 percent capital contribution would be
required to be calculated using the real property's value. An appraised
``as completed'' value is preferred; however, an ``as completed'' value
appraisal may not always be available, such as in the case of
purchasing raw land without plans for development in the near term,
which would typically have an ``as is'' value appraisal. Therefore, we
propose to permit the use of an ``as is'' appraisal, if an ``as
completed'' appraisal is not available, for purposes of the 15 percent
capital contribution.\23\
---------------------------------------------------------------------------
\23\ We intend that the terms ``as completed'' and ``as is,'' as
used in the definition of HVCRE exposure, would have the same
meaning as in the Interagency Appraisal and Evaluation Guidelines
(December 2, 2010), issued by the OCC, the FRB, the FDIC, the Office
of Thrift Supervision, and the National Credit Union Administration.
Under these Guidelines, ``as completed'' reflects property's market
value as of the time that development is expected to be completed,
and ``as is'' means the estimate of the market value of real
property in its current physical condition, use, and zoning as of
the appraisal's effective date.
---------------------------------------------------------------------------
[[Page 47606]]
In addition, we would allow the use of a collateral evaluation of
the real property instead of an appraisal to determine the value, for
purposes of the HVCRE exposure definition, where our appraisal
regulations \24\ permit collateral evaluations to be used in lieu of
appraisals.
---------------------------------------------------------------------------
\24\ See Sec. 614.4260(c), which sets forth the types of real
estate-related transactions that do not require appraisals.
---------------------------------------------------------------------------
The FBRAs' regulatory exclusion for Certain Commercial Real
Property Projects specifies that an ``as completed'' value appraisal
must be used. This is consistent with the EGRRCPA's statutory
definition for the Certain Commercial Real Property Projects exclusion,
which included only appraised ``as completed'' values. As explained by
the FBRAs, the EGRRCPA required this appraised ``as completed'' value
for their regulations. In the preamble of their final rule, the FBRAs
clarified their definition allows ``as is'' appraisals for raw land
loans and collateral evaluations for loans in amounts under certain
specified thresholds in their appraisal regulations.\25\ However, the
FBRAs did not change the wording of the EGRRCPA's statutory definition
in their regulations to reflect this interpretation. The EGRRCPA does
not apply to System institutions, and FCA is not required to adopt the
statutory definition. Accordingly, we propose to deviate from the
statutory definition for Certain Commercial Real Property Projects to
include ``as is'' appraisals and collateral evaluations to align our
regulation with the FBRAs' interpretation of the definition.
---------------------------------------------------------------------------
\25\ See 84 FR 68019, 68027 (December 13, 2019).
---------------------------------------------------------------------------
d. Project
In this proposal, the 15 percent capital contribution and the
appraisal or collateral evaluation would be measured in relation to a
``project.'' 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. 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 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. We expect that each project phase being
financed by a credit facility have a proper appraisal or evaluation
with an associated ``as completed'' or ``as is'' value. Where
appropriate and in accordance with the System institution's applicable
underwriting standards, a System institution may look at a multiphase
project as a complete project rather than as individual phases.
5. Reclassification as a Non-HVCRE Exposure
Under the proposal, a System institution would be 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 institution's loan underwriting standards for permanent
financings. We expect each System institution to have prudent, clear,
and measurable underwriting standards, which we may review through the
examination process.
6. Applicability Only to Loans Made After Effective Date
In consideration of the changes this rule would require, we propose
that only loans made after the effective date of this rule would be
subject to the HVCRE risk-weighting requirements. Loans made prior to
the rule's effective date could continue to be risk-weighted as if the
rule had not been adopted.
After the effective date, when a System institution modifies a loan
or if a 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 institution must treat the loan as a new exposure and reevaluate
the exposure to determine whether or not it is an HVCRE exposure.
C. Impact on Prior FCA Board Actions
FCA Bookletter BL-070 authorizes System institutions to assign a
reduced risk-weight (lower than the 100 percent risk-weight generally
assigned to commercial real estate exposures under FCA regulation Sec.
628.32(f)(1)) for rural water and wastewater (RWW) facilities that
satisfy criteria.\26\ BL-070 does not permit this reduced risk-weight
for exposures when a RWW facility is not fully operational due to
initial construction or major renovation; instead, institutions must
assign risk-weights to these ``major construction'' exposures in
accordance with Part 628 of our regulations.\27\ If this proposed
regulation is adopted, BL-070 would continue to assign risk-weights to
these ``major construction'' exposures in accordance with Part 628 as
it would be amended; in other words, an exposure to a RWW facility that
is not fully operational due to initial construction or major
renovation would continue to be assigned a risk-weight in accordance
with Part 628 (either as an HVCRE exposure or as a corporate exposure
under Sec. 628.32(f)(1), depending on whether it satisfies the
definition of HVCRE exposure or not). Under BL-070, a RWW exposure
during construction or major renovation, when the facility is not fully
operational, may not be assigned a reduced risk-weight. All other RWW
exposures would continue to receive reduced risk-weights in accordance
with BL-070.
---------------------------------------------------------------------------
\26\ BL-070: Revised Capital Treatment for Certain Water and
Wastewater Exposures, November 8, 2018.
\27\ BL-070 does allow the reduced risk-weight for exposures
during routine repair, upgrade, or maintenance projects that do not
impede the facility's full operation.
---------------------------------------------------------------------------
FCA Bookletter BL-053 authorizes System institutions to assign a
reduced risk-weight to certain electric cooperative exposures,
including for some power plants that are in the construction phase.\28\
This treatment is authorized under our reservation of authority.\29\ In
the future, we may consider whether the risk-weight authorized by BL-
053 remains appropriate.
---------------------------------------------------------------------------
\28\ FCA BL-053: Revised Regulatory Capital Treatment for
Certain Electric Cooperatives Assets, February 12, 2007.
\29\ See Sec. 628.1(d)(3).
---------------------------------------------------------------------------
III. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule would
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the System, considered together with its
affiliated associations, has assets and annual income in excess of the
amounts that would qualify them as small entities. Therefore, System
institutions are not ``small entities'' as defined in the Regulatory
Flexibility Act.
[[Page 47607]]
List of Subjects in 12 CFR Part 628
Accounting, Agriculture, Banks, Banking, Capital, Government
securities, Investments, Rural areas.
For the reasons stated in the preamble, part 628 of chapter VI,
title 12 of the Code of Federal Regulations is proposed to be amended
as follows:
PART 628--CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS
0
1. The authority citation for part 628 continues to read as follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4,
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9,
5.17, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093,
2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252,
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 ((12 U.S.C.
2154 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15
U.S.C. 78o-7 note).
0
2. Amend Sec. 628.2 by adding paragraph (6) to the definition of
``Corporate exposure'' and a new definition, in alphabetical order, for
``High volatility commercial real estate (HVCRE) exposure'' to read as
follows:
Sec. 628.2 Definitions.
* * * * *
Corporate exposure * * *
* * * * *
(6) A high volatility commercial real estate (HVCRE) exposure;
* * * * *
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 System 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, provided that the
dwelling (including attached components such as garages, porches, and
decks) represents at least 50 percent of the total appraised value of
the collateral secured by the first or subsequent lien. 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) [Reserved]
(C) Agricultural land, as defined in Sec. 619.9025 of this
chapter, or real estate used as an integral part of an aquatic
operation. This provision applies only to financing for the
agricultural and aquatic needs of bona fide farmers, ranchers, and
producers and harvesters of aquatic products under Sec. 613.3000 of
this chapter. This provision does not apply to loans for farm property
construction and land development purposes;
(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
System 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
System 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
loan-to-value limit set forth in Appendix A to this part;
(B) The borrower has contributed capital of at least 15 percent of
the real property's appraised, ``as completed'' value to the project.
The use of an ``as is'' appraisal is allowed in instances where an ``as
completed'' value appraisal is not available. The use of an evaluation
of the real property instead of an appraisal to determine the ``as
completed'' appraised value is allowed if Sec. 614.4260(c) of this
chapter permits evaluations to be used in lieu of appraisals. The
contribution may be 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 amount of capital required by
paragraph (2)(iv)(B) of this definition before the System institution
advances funds (other than the advance of a nominal sum made in order
to secure the System 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 System
institution as a non-HVCRE exposure under paragraph (6) of this
definition.
(3) An HVCRE exposure does not include any loan made prior to the
effective date of this rule.
(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 in accordance with
FCA regulations at subpart F of part 614 of this chapter, 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
System institution, a System 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 System institution's applicable loan
underwriting criteria for permanent financings.
(7) [Reserved].
* * * * *
0
3. Amend Sec. 628.32 by adding paragraph (j) to read as follows:
Sec. 628.32 General risk weights.
* * * * *
(j) High volatility commercial real estate (HVCRE) exposures. A
System institution must assign a 150-percent risk weight to an HVCRE
exposure.
* * * * *
0
4. Amend Sec. 628.63 by adding entry (b)(8) to Table 3 to Sec. 628.63
to read as follows:
[[Page 47608]]
Sec. 628.63 Disclosures.
* * * * *
(b) * * *
(4) * * *
* * * * *
Table 3 to Sec. 628.63--Capital Adequacy
------------------------------------------------------------------------
------------------------------------------------------------------------
* * * * * * *
Quantitative disclosures............... (b) Risk-weighted assets for:
* * * * * * *
(8) HVCRE exposures;
* * * * * * *
------------------------------------------------------------------------
* * * * *
0
5. Add Appendix A to Part 628 to read as follows:
Appendix A to Part 628--Loan-to-Value Limits for High Volatility
Commercial Real Estate Exposures
Table A sets forth the loan-to-value limits specified in
paragraph (2)(iv)(A) of the definition of high volatility commercial
real estate exposure in Sec. 628.2.
Table A--Loan-to-Value Limits for High Volatility Commercial Real Estate
Exposures
------------------------------------------------------------------------
Loan-to-value
Loan category limit
(percent)
------------------------------------------------------------------------
Raw Land................................................ 65
Land development........................................ 75
Construction: ..............
Commercial, multifamily,\1\ and other non- 80
residential........................................
1- to 4-family residential.......................... 85
Improved property................................... 85
Owner-occupied 1- to 4-family and home equity....... \2\ 85
------------------------------------------------------------------------
\1\ Multifamily construction includes condominiums and cooperatives.
\2\ If a loan is covered by private mortgage insurance, the loan-to-
value (LTV) may exceed 85 percent to the extent that the loan amount
in excess of 85 percent is covered by the insurance. If a loan is
guaranteed by Federal, State, or other governmental agencies, the LTV
limit is 97 percent.
The loan-to-value limits should be applied to the underlying
property that collateralizes the loan. For loans that fund multiple
phases of the same real estate project (e.g., a loan for both land
development and construction of an office building), the appropriate
loan-to-value limit is the limit applicable to the final phase of
the project funded by the loan; however, loan disbursements should
not exceed actual development or construction outlays. In situations
where a loan is fully cross-collateralized by two or more properties
or is secured by a collateral pool of two or more properties, the
appropriate maximum loan amount under loan-to-value limits is the
sum of the value of each property, less senior liens, multiplied by
the appropriate loan-to-value limit for each property. To ensure
that collateral margins remain within the limits, System
institutions should redetermine conformity whenever collateral
substitutions are made to the collateral pool.
Dated: August 12, 2021.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2021-17560 Filed 8-25-21; 8:45 am]
BILLING CODE 6705-01-P