[Federal Register Volume 86, Number 205 (Wednesday, October 27, 2021)]
[Rules and Regulations]
[Pages 59279-59282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-23381]



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 Rules and Regulations
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 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
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  Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / 
Rules and Regulations  

[[Page 59279]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 365

RIN 3064-AF72


Real Estate Lending Standards

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The FDIC is issuing a final rule to amend Interagency 
Guidelines for Real Estate Lending Policies (Real Estate Lending 
Standards). The purpose of the final rule is to incorporate 
consideration of the community bank leverage ratio (CBLR) rule, which 
does not require electing institutions to calculate tier 2 capital or 
total capital, into the Real Estate Lending Standards. The final rule 
allows 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 final rule also avoids any regulatory burden that could arise if an 
FDIC-supervised institution subsequently decides to switch between 
different capital frameworks.

DATES: The final rule is effective on November 26, 2021.

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.

SUPPLEMENTARY INFORMATION:

I. Policy Objectives

    The policy objective of the final 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 final 
rule amends 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. As described in more detail 
below in Section III, the final rule provides a consistent treatment 
for all FDIC-supervised banks without requiring the computation of 
total capital.

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\ 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\ As described in 
more detail below, the FDIC proposed a revision to the Real Estate 
Lending Standards to 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 provided 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 final rule ensures 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. Proposal

    On June 25, 2021, the FDIC published a notice of proposed 
rulemaking (NPR or proposal) to amend part 365 in response to changes 
in the type of capital information available after the implementation 
of the CBLR rule.\5\ The FDIC proposed to amend the Real Estate Lending 
Standards so that 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

[[Page 59280]]

appropriate allowance for credit losses \6\ 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.\7\ Further, the FDIC 
noted in the proposal that this approach would 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 proposed 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 did not consider 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 included the complete text of the section on loans 
in excess of the supervisory loan-to-value limits.
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    \5\ 86 FR 33570 (June 25, 2021).
    \6\ 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.
    \7\ 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. Comments

    The FDIC received only one comment on the proposal. The commenter, 
a trade organization, commended the FDIC for proposing this amendment 
to the calculation of supervisory LTV ratios as a sensible way to help 
provide uniform application of the measurement of the safety and 
soundness of all community banking organization on a consistent basis, 
and it noted that such consistency will allow community banking 
organizations to be assessed more effectively regardless of their 
decision to elect the CBLR for regulatory capital reporting.

V. The Final Rule

    For the reasons stated herein and in the NPR, the FDIC is adopting 
the proposal without change.

VI. Expected Effects

    As of March 31, 2021, the FDIC supervises 3,215 insured depository 
institutions. The revisions to the Real Estate Lending Standards apply 
to all FDIC-supervised institutions. The effect of the 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 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 revisions.
    Currently, 3,055 FDIC supervised institutions have total real 
estate loans that exceed the tier 1 capital plus allowance or reserve 
benchmark adopted in this final rule, and are thus potentially affected 
by these revisions depending on the distribution of their loan to value 
ratios. In comparison, 3,063 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 revisions, and their substantive effects are likely 
to be minimal.\8\
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    \8\ March 31, 2021, 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 almost no difference 
between the amount of its allowance for credit losses and its tier 2 
capital.\9\ 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 final rule to have material effects on the 
safety-and-soundness of, or compliance costs incurred by, FDIC-
supervised institutions.
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    \9\ According to March 31, 2021, Call Report data, the median 
FDIC-supervised institution that had not elected the CBLR framework 
reported an allowance for credit losses (or allowance for loan and 
lease losses if applicable) that was $3,000 (or about 0.45 percent) 
greater than tier 2 capital.
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VII. Alternatives

    The FDIC considered two alternatives; however, it believes that 
none are preferable to the final rule. 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 are retained by this final 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 final rule.

VIII. Regulatory Analysis

A. Effective Date

    In the proposal, the FDIC proposed to make all provisions of the 
final rule effective upon publication in the Federal Register. The FDIC 
noted that 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.'' \10\

[[Page 59281]]

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 
believed 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 believed it 
would have good cause for the final rule to become effective upon 
publication.
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    \10\ 5 U.S.C. 553(d)(3).
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    The FDIC did not receive any comment on whether good cause exists 
to waive the delayed effective date of the rule once finalized. 
However, because 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 revisions, the FDIC, after further consideration, has 
determined to implement a 30-day delayed effective date as provided in 
the APA. Accordingly, all provisions of the final rule will be 
effective 30 days after publication in the Federal Register.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a final rule, an agency prepare and make available for 
public comment a final regulatory flexibility analysis that describes 
the impact of the rule on small entities.\11\ 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.\12\ 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 final 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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    \11\ 5 U.S.C. 601 et seq.
    \12\ 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 March 31, 2021, the FDIC supervised 3,215 institutions, of 
which 2,333 were ``small entities'' for purposes of the RFA.\13\ The 
effect of the 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 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 final revisions.
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    \13\ March 31, 2021, Call Report data.
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    Currently, 2,210 small, FDIC supervised institutions have total 
real estate loans that exceed the tier 1 capital plus allowance or 
reserve benchmark in the revisions and are thus potentially affected by 
the revisions depending on the distribution of their loan to value 
ratios. In comparison, 2,218 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 final revisions, and their substantive 
effects are likely to be minimal.\14\
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    \14\ 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 almost no 
difference between the amount of its allowance for credit losses and 
its tier 2 capital.\15\ 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 final 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 
final 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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    \15\ According to March 31, 2021, Call Report data, the median 
small, FDIC-supervised institution that had not elected the CBLR 
framework reported an allowance for credit losses (or allowance for 
loan and lease losses if applicable) that was $1,000 (or about 0.17 
percent) greater than tier 2 capital.
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    Therefore, and based on the preceding discussion, the FDIC 
certifies that the final rule will not significantly affect a 
substantial number of small entities.

C. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (PRA),\16\ 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 final 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 final rule.
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    \16\ 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),\17\ 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

[[Page 59282]]

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.\18\
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    \17\ 12 U.S.C. 4802(a).
    \18\ Id. at 4802(b).
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    The FDIC believes that this final rule does not impose new 
reporting, disclosure, or other requirements, and likely instead 
reduces 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. Therefore, the FDIC believes that it is not 
necessary to delay the effective date beyond the 30-day period provided 
in the APA.

E. Plain Language

    Section 722 of the GLBA \19\ requires each Federal banking agency 
to use plain language in all of its proposed and final rules published 
after January 1, 2000. The FDIC sought to present the final rule in a 
simple and straightforward manner and did not receive any comments on 
the use of plain language in the proposal.
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    \19\ 12 U.S.C. 4809.
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F. Congressional Review Act

    For purposes of the Congressional Review Act, OMB makes a 
determination as to whether a final rule constitutes a ``major'' rule. 
If a rule is deemed a ``major rule'' by the OMB, the Congressional 
Review Act generally provides that the rule may not take effect until 
at least 60 days following its publication.
    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 (1) 
an annual effect on the economy of $100,000,000 or more; (2) a major 
increase in costs or prices for consumers, individual industries, 
Federal, State, or local government agencies or geographic regions; or 
(3) 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.
    The OMB has determined that the final rule is not a major rule for 
purposes of the Congressional Review Act, and the FDIC will submit the 
final rule and other appropriate reports to Congress and the Government 
Accountability Office for review.

List of Subjects in 12 CFR Part 365

    Banks, Banking, Mortgages, Savings associations.

Authority and Issuance

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

PART 365--REAL ESTATE LENDING STANDARDS

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 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 October 21, 2021.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2021-23381 Filed 10-26-21; 8:45 am]
BILLING CODE 6714-01-P