[Federal Register Volume 89, Number 70 (Wednesday, April 10, 2024)]
[Rules and Regulations]
[Pages 25117-25130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-07060]



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 Rules and Regulations
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  Federal Register / Vol. 89, No. 70 / Wednesday, April 10, 2024 / 
Rules and Regulations  

[[Page 25117]]



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: Final rule.

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SUMMARY: The Farm Credit Administration (FCA or Agency) is amending its 
regulatory capital requirements for Farm Credit System (FCS or System) 
banks and associations to define and establish a risk weight for High 
Volatility Commercial Real Estate (HVCRE) exposures.

DATES: The final rule will be effective January 1, 2025.

FOR FURTHER INFORMATION CONTACT: 
    Technical information: Ryan Leist, [email protected], Associate 
Director, Finance and Capital Markets Team, or Xahra Pollard, 
[email protected], Senior Policy Analyst, Office of Regulatory Policy, 
(703) 883-4223, TTY (703) 883-4056 or [email protected]; or
    Legal information: Jennifer Cohn, [email protected], Assistant General 
Counsel, Office of General Counsel, (703) 883-4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
    A. Objectives of the Final Rule
    B. Background
    1. Farm Credit System
    2. Post-Financial Crisis Capital Rulemakings
    3. ADC Lending Risk and HVCRE Risk Weight
II. Summary of the Proposed Rule, Comments Received, and Final Rule
    A. Summary of the Proposed Rule
    B. Comments Received
    C. Discussion of Final Rule and Responses to Comments
    1. Scope of HVCRE Exposure Definition
    2. Exclusions From HVCRE Exposure Definition
    a. One- to Four-Family Residential Properties
    b. Agricultural Land
    c. Loans on Existing Income Producing Properties That Qualify as 
Permanent Financings
    d. Certain Commercial Real Property Projects
    i. Loan-to-Value Limits
    ii. Contributed Capital
    iii. Value Appraisal
    iv. Project
    e. Loans Originated for Less Than $500,000
    f. Consideration of Additional Exclusions
    i. Project Financing of Public and Private Facilities
    ii. Agricultural Production or Processing Facilities With 
Contractual Purchase Agreements in Place
    iii. Minor Improvements or Alterations to Real Property
    iv. Credit Facilities Where Repayment Would Be From the Ongoing 
Business of the Borrower
    v. De Minimis Financings
    3. Reclassification as a Non-HVCRE Exposure
    4. Applicability Only to Loans Made After January 1, 2025
    5. Impact on Prior FCA Board Actions
III. Regulatory Analysis
    A. Regulatory Flexibility Act
    B. Congressional Review Act

I. Introduction

A. Objectives of the Final Rule

    FCA's objectives in adopting this rule are to:
     Update capital requirements to reflect the increased risk 
characteristics exposures to certain acquisition, development or 
construction (ADC) loans pose to System institutions; and
     Ensure the System's capital requirements are comparable to 
the Basel Framework issued by the Basel Committee on Banking 
Supervision (BCBS or Basel Committee) and the standardized approach the 
Federal banking regulatory agencies (FBRAs) have adopted,\1\ with 
deviations as appropriate to accommodate the different regulatory, 
operational, and credit considerations of the System.
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    \1\ The FBRAs are the Office of the Comptroller of the Currency 
(OCC), Board of Governors of the Federal Reserve System (FRB), and 
the Federal Deposit Insurance Corporation (FDIC). In general, under 
the standardized approach, an institution's regulator assigns fixed 
risk weights to exposures based on their relative risk 
characteristics. (See Basel Framework at CRE 20).
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B. Background

1. Farm Credit System
    In 1916, Congress created the System to provide permanent, 
affordable, and reliable sources of credit and related services to 
American agricultural and aquatic producers. As of January 1, 2024, the 
System consists of three Farm Credit Banks, one agricultural credit 
bank, 55 agricultural credit associations, one Federal land credit 
association, several service corporations, and the Federal Farm Credit 
Banks Funding Corporation (Funding Corporation).\2\ System banks 
(including both the Farm Credit Banks and the agricultural credit bank) 
issue Systemwide consolidated debt obligations in the capital markets 
through the Funding Corporation,\3\ which enables the System to extend 
short-, intermediate-, and long-term credit and related services to 
eligible borrowers. Eligible borrowers include farmers, ranchers, 
aquatic producers and harvesters and their cooperatives, rural 
utilities, exporters of agricultural commodities products, farm-related 
businesses, and certain rural homeowners. The System's enabling statute 
is the Farm Credit Act of 1971, as amended (Act).\4\
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    \2\ The Federal Agricultural Mortgage Corporation (Farmer Mac) 
is a Farm Credit System institution that was established in 1988 to 
create a secondary market for agricultural real estate mortgage 
loans and other rural-focused loans. The FCA has a separate set of 
capital regulations, at subpart B of part 652, that apply to Farmer 
Mac. This rulemaking does not affect Farmer Mac, and the use of the 
term ``System institution'' in this preamble and rule does not 
include Farmer Mac.
    \3\ The Funding Corporation was established pursuant to section 
4.9 of the Farm Credit Act of 1971, as amended, and is owned by all 
System banks. The Funding Corporation is the fiscal agent and 
disclosure agent for the System. The Funding Corporation is 
responsible for issuing and marketing debt securities to finance the 
System's loans, leases, and operations and for preparing and 
producing the System's financial results.
    \4\ 12 U.S.C. 2001-2279cc. The Act is available at www.fca.gov 
under ``Laws and regulations'' and ``Statutes.''
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2. Post-Financial Crisis Capital Rulemakings
    In October 2013 and April 2014, the FBRAs published in the Federal 
Register capital rules governing the banking organizations they 
regulate (the U.S. rule).\5\ When it was adopted, the U.S. rule 
reflected, in part, the BCBS's

[[Page 25118]]

document entitled ``Basel III: A Global Regulatory Framework for More 
Resilient Banks and Banking Systems'' (Basel III).\6\ Although the U.S. 
rule has been updated since then, the risk weights generally have not 
changed.
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    \5\ 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).
    \6\ See ``Basel III: A global regulatory framework for more 
resilient banks and banking systems,'' revised version June 2011, 
and other Basel III documents at https://www.bis.org/bcbs/basel3.htm?m=2572. Prior to the FBRAs' adoption of these 
regulations, their rules reflected earlier Basel frameworks.
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    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.\7\ Basel III was an internationally agreed upon 
set of measures developed in response to the 2007-2009 worldwide 
financial crisis with the goal of strengthening the regulation, 
supervision, and risk management of banks. Since that time, the BCBS 
has revised, updated, and integrated the Basel III reforms into a 
consolidated Basel Framework (Basel Framework), which comprises of all 
of the current and forthcoming BCBS standards.\8\ U.S. banking 
regulators are not required by law to adopt the Basel Framework but, as 
discussed above, the U.S. rule, which the FBRAs continue to update,\9\ 
is Basel-based.\10\
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    \7\ The FBRAs are represented on the Basel Committee, but the 
FCA is not.
    \8\ The Basel Framework can be found at http://www.bis.org/basel_framework/index.htm, and the BCBS continues to update it as 
indicated on the website.
    \9\ On September 18, 2023, the FBRAs issued a notice of proposed 
rulemaking (FR 88 64028) that would substantially revise the capital 
requirements applicable to large banking organizations and to 
banking organizations with significant trading activity. The 
proposed revisions would be generally consistent with recent changes 
to international capital standards by the BCBS.
    \10\ The Federal Housing Finance Agency, which oversees the 
Federal National Mortgage Association and the Federal Home Loan 
Mortgage Corporation, has also adopted Basel-based capital rules.
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    FCA has had tier 1/tier 2 capital rules that are comparable to the 
Basel guidelines and the U.S. rule since 2016.\11\ Beginning in 2010, 
System institutions requested FCA adopt a capital framework that was as 
similar as possible to the capital guidelines of the FBRAs. 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.\12\
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    \11\ While FCA's earlier capital regulations incorporated some 
elements of Basel standards and the FBRAs' rules, particularly the 
risk weighting of assets in the denominator of the capital ratios, 
the rule FCA adopted in 2016 aligned the System's capital 
requirements more closely with the Basel III framework and with the 
U.S. rule's standardized approach (which was based on Basel 
standards). See 81 FR 49720 (July 28, 2016). FCA has amended its 
capital rules since 2016, most significantly in 2021. See 86 FR 
54347 (October 1, 2021). Like the FBRAs, FCA is not required by law 
to follow the Basel standards. The FCA's rule differed in some 
respects from the Basel standards and the U.S. rule in consideration 
of the cooperative structure and the organization of the System.
    \12\ See 79 FR 52814, 52820 (September 4, 2014).
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3. ADC Lending Risk and HVCRE Risk Weight
    Included in the provisions of FCA's 2014 proposed rulemaking to 
revise its regulatory capital requirements was a 150 percent risk 
weight for HVCRE exposures due to their higher risk 
characteristics.\13\ As discussed below, HVCRE exposures are defined as 
acquisition, development, or construction exposures that meet certain 
criteria, and do not qualify for any of the exclusions, in the 
definition.
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    \13\ 79 FR 52814 (September 4, 2014).
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    HVCRE exposures have increased risk characteristics supporting a 
150 percent risk weight. Key risks to projects during the development 
and construction phase include, among others, financial risks, contract 
risks, and environmental risks. Financial risks include, but are not 
limited to, project delays and cost overruns, sponsor risk, project 
feasibility risk, and contractor risks. While these risks can be a 
threat to any type of lending, they are of particular risk to 
construction loans, because they can hinder project completion, and 
repayment of construction loans usually cannot begin until the project 
is finished.\14\
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    \14\ Projects where repayment can begin before completion have 
fewer risk characteristics and may warrant a lower risk weight. As 
discussed in Section II.C.1 of this preamble--Scope of HVCRE 
Exposure Definition--under the third criterion of the HVCRE exposure 
definition, a credit facility that will be repaid from the 
borrower's ongoing business, as opposed to being repaid from future 
income or sales proceeds from the property, would not be classified 
as an HVCRE exposure. Moreover, as discussed in Section II.C.2.c of 
this preamble--Loans on Existing Income Producing Properties That 
Qualify as Permanent Financings--loans on existing income producing 
properties that qualify as permanent financings are excluded from 
the definition of HVCRE exposure.
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    Project delays and cost overruns are two key financial risks to 
construction loans. Supply chain constraints, permit delays, and labor 
shortages are some examples of factors that can contribute to the delay 
of projects or their costs exceeding budget. Other financial risks 
include sponsor, project feasibility, and contractor risks. Sponsors 
without adequate and relevant industry and project planning experience 
and expertise increase the risk of a construction project incurring 
additional costs and delays, including permitting delays. Inadequate 
sponsor financial strength can impact the availability of sponsor 
capital when needed for budget overruns. Project feasibility 
considerations include changes in either supply or demand factors, 
technology considerations, and competitive forces, which could 
detrimentally impact the underlying economics of a construction 
project. Contractor risk can threaten the financial viability of a 
construction project if the contractor does not have the requisite 
experience and expertise to complete the project successfully. 
Contractor inefficiencies or errors can derail a project's timeline or 
budget. The financial capacity of the contractor is also critical, 
especially in cases where the contractor is responsible for any cost 
overruns.
    Contract risk is another key category of risk in construction 
lending. One of the most important contractual agreements in a 
construction project is the construction contract. While some types of 
construction contracts shift the responsibility of managing key aspects 
of the project to a contractor, other contracts can leave the borrower 
exposed to such risks as fluctuations in input costs and potential 
contract disputes with sub-contractors.
    Another key risk to construction projects is environmental risk. 
Such risk can arise when site assessments are not properly conducted 
prior to construction and unidentified environmental issues such as 
contamination later derail project timelines or budgets, or even 
threaten the viability of the project. Contamination can also occur 
after construction has already begun and potentially involve expensive 
cleanup costs. Beyond contamination, borrowers also face other 
potential environmental impacts of the project, including the effects 
on native habitats for flora and fauna where legal or regulatory 
protections are in place.
    FCA has recently seen certain System institution-funded 
construction projects particularly challenged due to some of the risks 
discussed above. Specifically, supply chain disruptions and labor 
shortages have led to project delays and cost overruns following the 
COVID-19 pandemic, recent geopolitical events, and increased inflation. 
Inflationary pressures continue to persist and have impacted the costs 
of some rural infrastructure projects.
    Supply chain constraints and disruptions in project financings 
across different industries, including the leasing sector, have in some 
cases resulted in material increases in project costs and construction 
delays. The

[[Page 25119]]

impact to costs and schedules has stemmed partly from the inadequate 
supply of key components but also from increased input costs. Such 
supply chain issues could pose a credit risk to System institutions if 
construction timelines are materially impacted and construction costs 
increase significantly during the construction phase.
    As discussed above, various risks have continued to underscore 
construction lending, some of which have been more evident in recent 
years. These risks threaten the ability for such projects to be 
completed in a manner that ensures adequate repayment to lenders. As 
such, construction exposures warrant the higher risk weight proposed in 
this rule.
    The FBRAs first recognized the higher risk in construction lending 
in the higher risk weights they adopted in their capital regulations in 
2013-2014. FCA's 2014 proposed HVCRE provisions were very similar to 
those the FBRAs had adopted. System commenters expressed concern about 
parts of the proposed HVCRE definition and asked FCA not to adopt the 
definition. FCA did not adopt the HVCRE provisions in its capital rule 
in 2016, because it wanted to further consider and analyze HVCRE and 
the issues related to these exposures. In the preamble to the final 
capital rule in 2016, FCA said the Agency expected to engage in 
additional HVCRE rulemaking in the future.\15\
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    \15\ 81 FR 49719, 49736 (July 28, 2016).
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    Beginning in 2017, the FBRAs issued several proposed rules on HVCRE 
exposures to address concerns with the original definition.\16\ On May 
24, 2018, the President signed into law the Economic Growth, Regulatory 
Relief, and Consumer Protection Act (EGRRCPA),\17\ 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.\18\
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    \16\ FCA staff submitted a comment letter in response to one of 
the proposals that communicated concerns with a proposed exemption 
for agricultural land.
    \17\ Public Law 115-174, 132 Stat. 1296 (2018).
    \18\ 84 FR 68019.
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    Recognizing the need to update capital requirements to reflect the 
increased risk characteristics that exposures to HVCRE loans pose to 
System institutions, and in accordance with this rule's objective to 
ensure continued comparability to the Basel guidelines and the FBRAs' 
rules, on August 26, 2021, FCA published in the Federal Register a 
notice of proposed rulemaking (proposed rule or proposal) seeking 
public comment on amendments to its capital rules to define and 
establish a risk weight for HVCRE exposures.\19\
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    \19\ 86 FR 47601 (August 26, 2021). The proposed rule included a 
90-day comment period. On October 20, 2021, FCA published in the 
Federal Register a notice extending the comment period for an 
additional 60 days, until January 24, 2022.
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II. Summary of the Proposed Rule, Comments Received, and Final Rule

    FCA's proposed rule was similar to the FBRAs' rule in most 
respects, with deviations as appropriate to accommodate the different 
regulatory, operational, and credit considerations of the System. 
Notably, the proposed rule contained provisions from the FBRAs' final 
rule that addressed certain concerns commenters raised in response to 
the FCA's 2014 proposed rule.
    As discussed further below, FCA is adopting a final definition of 
HVCRE exposure with one modification from the proposal based on 
comments received. The Agency is also clarifying in this preamble 
certain provisions of the HVCRE rule.
    FCA reminds System institutions that this is a risk-weighting 
regulation only. System scope and eligibility authorities are contained 
in other provisions of FCA's regulations and in the Act.\20\
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    \20\ As stated in the preamble to the capital rule FCA adopted 
in 2016, ``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).
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A. Summary of the Proposed Rule

    Because of the increased risk characteristics in HVCRE exposures, 
FCA proposed, 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.\21\
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    \21\ FCA regulation Sec.  628.32(f)(1).
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B. Comments Received

    In response to the HVCRE proposal, FCA received 11 comment letters: 
One letter from the Farm Credit Council (FCC), with input from a System 
workgroup, consisting of several System institutions, that was 
established to review the HVCRE proposal and other related documents 
(System Comment Letter); \22\ one letter each from CoBank, ACB (CoBank 
Letter),\23\ Farm Credit Bank of Texas (FCBT Letter),\24\ and AgriBank, 
FCB (AgriBank Letter),\25\ all of which are System banks; and letters 
from seven System associations: Farm Credit Mid-America, ACA,\26\ Farm 
Credit of the Virginias, ACA,\27\ Northwest Farm Credit Services, ACA 
(Northwest Letter),\28\ Capital Farm Credit, ACA,\29\ Farm Credit 
West,\30\ ACA, Compeer Financial, ACA,\31\ and Farm Credit of Florida, 
ACA.\32\ All System bank and association commenters supported the 
System Comment Letter, and several included identical language seeking 
clarification on several provisions and requesting further exclusions 
to the HVCRE exposure definition. Furthermore, no commenters supported 
any specific provisions of the proposed rule, and they all stated the 
burden of identifying HVCRE loans on an ongoing basis greatly exceeds 
the benefit of identifying the minimal potential adverse impact that 
such loans could have on the safety and soundness of a System 
institution. However, System commenters generally supported FCA's 
attempt to ensure FCA's capital rules are similar to those adopted by 
the FBRAs with the guiding principle that 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.
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    \22\ System Comment Letter dated January 19, 2022.
    \23\ CoBank Letter dated January 20, 2022.
    \24\ FCBT Letter dated January 24, 2022.
    \25\ AgriBank Letter dated January 24, 2022.
    \26\ Farm Credit Mid-America, ACA Letter dated January 26, 2022.
    \27\ Farm Credit of the Virginias, ACA Letter dated January 24, 
2022.
    \28\ Northwest Letter dated January 24, 2022. Northwest Farm 
Credit Services, ACA merged with Farm Credit West, ACA to form 
AgWest Farm Credit, ACA, effective January 1, 2023.
    \29\ Capital Farm Credit, ACA Letter dated January 21, 2022.
    \30\ Farm Credit West, ACA Letter dated January 22, 2022. Farm 
Credit West, ACA merged with Northwest Farm Credit Services, ACA to 
form AgWest Farm Credit, ACA, effective January 1, 2023.
    \31\ Compeer Financial, ACA Letter dated January 18, 2022.
    \32\ Farm Credit of Florida, ACA Letter dated January 21, 2022.
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C. Discussion of Final Rule and Responses to Comments

1. Scope of HVCRE Exposure Definition
    FCA proposed to define an HVCRE exposure as ``a credit facility 
secured by land or improved real property'' that met the three criteria 
discussed below (and that did not meet any of the definition's 
exclusions, which are discussed in Section II.C.2 of this preamble--
Exclusions From HVCRE Exposure Definition).\33\ If a credit facility 
secured by land or improved real property did not meet all three

[[Page 25120]]

criteria, it would not be an HVCRE exposure.
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    \33\ FCA regulation Sec.  614.4240(q) defines ``real property'' 
as ``all interests, benefits, and rights inherent in the ownership 
of real estate.''
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    The determination of whether a credit facility is an HVCRE exposure 
is made on new exposures only. New exposures determined not to be HVCRE 
after initial evaluation do not need to be evaluated again as HVCRE 
exposures. New exposures include loan originations, modifications, and 
project alterations that materially change 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).
    Credit facilities that meet the definition of HVCRE exposure after 
initial evaluation may be reclassified as non-HVCRE if they meet the 
criteria discussed in Section II.C.3 of this preamble--Reclassification 
as a Non-HVCRE Exposure.
    Under the proposed definition, a credit facility is secured by land 
or improved real property 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.\34\ For example, if an institution made a loan to 
construct and equip a building, and the loan was secured by both the 
real estate and the equipment, the institution would have to estimate 
the value of the building, upon completion, and of the equipment. If 
the value of the building was greater than 50 percent of the principal 
amount of the loan at origination, the loan would be a ``credit 
facility secured by land or improved real property.'' \35\ If the value 
of the building, upon completion, was less than 50 percent of the 
principal amount of the loan at origination, it would not be a ``credit 
facility secured by land or improved real property.'' Accordingly, it 
would not be an HVCRE exposure.
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    \34\ This proposed definition is consistent with the definition 
of ``a loan secured by real estate'' in the FBRAs' Call Report forms 
and instructions.
    \35\ 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.
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    As discussed above, a credit facility that is secured by land or 
improved real property would not be classified as an HVCRE exposure 
under the proposed rule unless it met three criteria. If such a 
facility did not meet all three criteria, it would not be an HVCRE 
exposure. These criteria are discussed below.
Description of Three Criteria of HVCRE Definition
    First, under paragraph (1)(i) of the proposed HVCRE definition, the 
credit facility must primarily finance, have financed, or refinance the 
acquisition, development, or construction of real property. This 
criterion would be satisfied if more than 50 percent of the proposed 
use of the loan funds was for the acquisition, development, or 
construction of real property. The criterion would not be satisfied if 
50 percent or less of the proposed use of the loan funds was for the 
acquisition, development, or construction of real property. In the case 
of revolver loans that are secured by land or real property, if more 
than 50 percent of the proposed use of the revolver funds is for 
acquisition, development, or construction of real property, the entire 
loan would satisfy this criterion and potentially be subject to HVCRE 
classification if it meets the other two criteria and is not subject to 
an exclusion.
    Second, under paragraph (1)(ii) of the proposed HVCRE definition, 
the purpose of the credit facility must be to provide financing to 
acquire, develop, or improve such real property into income-producing 
property.
    Finally, under paragraph (1)(iii) of the proposed HVCRE definition, 
the repayment of the credit facility must depend upon the future income 
or sales proceeds from, or refinancing of, such real property. The 
preamble to the proposed rule explained that under this criterion, 
credit facilities that would be repaid from the borrower's ongoing 
business, as opposed to being repaid from future income or sales 
proceeds from the property, would not be classified as an HVCRE 
exposure.
Comments on HVCRE Exposure Definition and FCA's Responses
    FCA received various comments on the proposed definition of HVCRE 
exposures, including the three criteria. On a broad level the Farm 
Credit Council, supported by all System bank and association 
commenters, commented that the rulemaking was not needed due to limited 
opportunity for System institutions to make HVCRE loans. They commented 
that the burden in identifying these loans exceeds the benefit of 
identifying the risk to safety and soundness.\36\
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    \36\ CoBank Letter dated January 20, 2022, and Farm Credit of 
Florida, ACA Letter, dated January 21, 2022, reiterated this comment 
verbatim while Capital Farm Credit, ACA Letter, dated January 21, 
2022, reiterated the comment in summary form.
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    These comments are premised on a misunderstanding of the definition 
of HVCRE. Specifically, these comments assert that the HVCRE risk 
weight ``was designed by the FBRAs to identify commercial real estate 
loans of a speculative nature (such as office buildings and strip malls 
without signed lessees).'' \37\
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    \37\ System Comment Letter dated January 19, 2022, page 2.
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    Contrary to the commenters' assertion, the FBRAs' definition 
includes more than just speculative commercial real estate loans. The 
plain language of their definition includes all credit facilities that 
are secured by land or improved real property and that satisfy the 
three criteria and are not subject to an exclusion. None of the 
criteria and exclusions limit the HVCRE definition only to speculative 
commercial real estate loans. The HVCRE definition, including the three 
criteria and considering the exclusions, includes, for example, project 
finance construction and construction of facilities dependent on third-
party integrator agreements. System institutions make loans of this 
nature, and such loans satisfy this definition.
    The System Comment Letter also stated that there are better ways to 
accomplish the Agency's objectives.\38\ Two commenters referenced 
System practices currently in place at System institutions to control 
risk concentrations in construction exposures including risk-based 
borrower ratings, concentration and hold limits, and underwriting 
standards.\39\ While the Agency recognizes that System institutions can 
mitigate their HVCRE risk exposures through risk management practices, 
regulatory risk weights ensure that a minimum amount of capital is 
reserved by all institutions. In the same way that corporate exposures 
are generally risk-weighted at 100 percent \40\ and certain past due 
and nonaccrual exposures are risk-weighted at 150 percent \41\ despite 
variations in institutions' credit administration practices, HVCRE 
exposures should all be subject to the same risk weight, regardless of 
an

[[Page 25121]]

individual institution's risk management practices.
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    \38\ CoBank Letter dated January 20, 2022, and Farm Credit of 
Florida, ACA Letter, dated January 21, 2022, reiterated this comment 
verbatim while Capital Farm Credit, ACA Letter, dated January 21, 
2022, reiterated the comment in summary form.
    \39\ Farm Credit of the Virginias, ACA Letter dated January 24, 
2022, and Farm Credit West, ACA Letter dated January 22, 2022.
    \40\ Sec.  628.32(f)(1).
    \41\ FCA regulation Sec.  628.32(k)(1) assigns a 150 percent 
risk weight to past due and nonaccrual exposures, except sovereign 
or residential exposures, that are not guaranteed or secured by 
financial collateral.
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    The System Comment Letter, supported by all System bank and 
association commenters, included various questions and comments 
regarding the proposed third criterion.\42\ The Letter requested 
clarification of the terms ``future income'' and ``income from ongoing 
business''; asked whether ``income from ongoing business'' includes any 
assets built and operated by the business that developed the property; 
asked the percentage of future and ongoing income relied upon when 
determining whether a property is income-producing; and requested 
consideration of the fact that repayment can come from multiple 
sources. Moreover, the letter requested an explicit exclusion in the 
regulation for credit facilities for which repayment would be from the 
ongoing business of the borrower as well as removal of ``third-party 
rent or lease payments'' from the proposed definition. Finally, the 
letter included a request for FCA to consider the impact of ``third-
party rent or lease payments'' on young, beginning, or small (YBS) 
farmers who may rely on third-party integrator agreements to start 
themselves in agriculture.\43\
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    \42\ Farm Credit of Florida, ACA Letter, dated January 21, 2022, 
reiterated the System Comment Letter's questions and comments 
verbatim.
    \43\ Section 4.19 of the Act requires each System association, 
under policies of and subject to review and approval of its funding 
bank, to prepare a program for furnishing sound and constructive 
credit and related services to YBS farmers and ranchers. This 
requirement is implemented by FCA regulations at 12 CFR 614.4165.
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    In response to these comments, FCA reiterates that the proposed 
third criterion was that the credit facility is ``dependent on future 
income or sales proceeds from, or refinancing of,'' the property for 
repayment. The proposed regulation did not refer to ``income from 
ongoing business.'' The preamble to the proposed rule discussed loan 
repayment from ongoing business as an example of a form of repayment 
that does not satisfy the proposed third criterion because it is not 
repayment from future income or sales proceeds from the real 
property.\44\ FCA confirms that if a credit facility was dependent on 
any form of repayment other than future income or sales proceeds from, 
or the refinancing of, the real property, including repayment from 
income generated by any assets within a borrower's portfolio, it would 
not satisfy this proposed criterion and would therefore not be an HVCRE 
exposure.
---------------------------------------------------------------------------

    \44\ 86 FR 47601, 47603 (August 26, 2021).
---------------------------------------------------------------------------

    The System Comment Letter specifically referenced assets built and 
operated by the business that developed the property. FCA clarifies 
that for the purpose of HVCRE classification, the cash flow of the 
borrower must be analyzed, not that of the property developer or some 
other entity other than the borrower. Because this preamble clarifies 
the plain language of the third criterion, that credit facilities for 
which repayment would be from the ongoing business of the borrower are 
not covered by that criterion and are not HVCRE exposures, explicit 
regulatory language to that effect is not needed.
    In response to the question about the percentage of future and 
ongoing income relied upon when determining whether a property is 
income-producing and for consideration of the fact that repayment can 
come from multiple sources (both ongoing and future income or sales 
proceeds), FCA retains the proposed requirement that if any part of the 
repayment on a credit facility depends on future income or sales 
proceeds, the credit facility satisfies the proposed third criterion. 
FCA believes specifying a percentage threshold for future income other 
than zero to determine HVCRE status would be overly complicated and 
burdensome. The Agency recognizes that repayment of credit facilities 
may come from multiple sources but, for the purpose of HVCRE 
classification, if any repayment depends on future income or sales 
proceeds, the exposure would meet the proposed third criterion of the 
definition of HVCRE.
    Regarding the System Comment Letter's request to remove ``third-
party rent or lease payments'' from the proposed definition of HVCRE 
exposure, FCA notes that terminology is not actually included in the 
definition. Rather, it is found in the preamble to the proposed rule, 
in a discussion of ``certain commercial real property projects'' that 
would qualify for exclusion from HVCRE.\45\ As such, there is no need 
to remove that term from the definition of HVCRE. However, in Section 
II.C.2.d of this preamble--Certain Commercial Real Property Projects--
the reference to ``third-party rent or lease payments'' that was in the 
preamble to the proposed rule has been replaced with a reference to 
``revenues from future income.''
---------------------------------------------------------------------------

    \45\ 86 FR 47601, 47604 (August 26, 2021).
---------------------------------------------------------------------------

    As discussed above, credit facilities where repayment would be from 
any type of future income, including third-party rents or lease 
payments, were included in the proposed definition of HVCRE to reflect 
the risk of such facilities. Excluding third-party rents or lease 
payments, including third-party integrator agreements, from the 
definition of future income is not warranted by the risk in those 
exposures. There is further discussion around exclusions for integrator 
contracts in Section II.C.2.f.ii of this preamble--Agricultural 
Production or Processing Facilities with Contractual Purchase 
Agreements in Place--including the Agency's consideration of YBS 
farmers.
    For the reasons stated above, FCA is adopting as final, without 
change from the proposal, the definition of HVCRE as a credit facility 
secured by land or improved real property. In addition, the Agency is 
adopting, as proposed, the three criteria outlined above. The 
exclusions from the HVCRE definition, as well as related comments and 
FCA's responses, will be discussed in the next section of the preamble.
    FCA's final rule is similar to the FBRAs' rule in most respects, 
but it differs in two general areas. The FBRAs' rule clarified the 
interpretation of certain terms generally to be consistent with their 
usage in other FBRA regulations or Call Report instructions. The FCA 
did not propose different interpretations of these terms, nor did the 
Agency propose to refer to these FBRA references. In addition, FCA 
proposed some differences where appropriate to accommodate the 
different regulatory, operational, and credit considerations of the 
System, while continuing to maintain appropriate safety and soundness. 
FCA's proposed definition of HVCRE exposure was intended to capture 
only those exposures that have increased risk characteristics in the 
acquisition, development, or construction of real property.
2. Exclusions From HVCRE Exposure Definition
    Under FCA's HVCRE proposal, like the FBRA rule, four broad types of 
exposures were excluded from the definition of HVCRE exposure. These 
types of exposures are discussed in the following sections.
a. One- to Four-Family Residential Properties
    Under paragraph (2)(i)(A) of FCA's proposed HVCRE definition, as in 
a similar provision of the FBRA rule, an HVCRE exposure did 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) represented at least 50 percent of 
the total appraised value of

[[Page 25122]]

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 
proposed exclusion, as would construction loans secured by single 
family dwelling units, duplex units, and townhouses. Condominium and 
cooperative construction loans would qualify for this proposed 
exclusion, even if the loan was financing the construction of a 
building with five or more dwelling units, if the repayment of the loan 
came from the sale of individual condominium dwelling units or 
individual cooperative housing units.
    This proposed 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 proposed exclusion only if the property 
securing the credit facility exhibited 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 
proposed exclusion.
    Loans for multifamily residential property construction (such as 
apartment buildings where loan repayment is dependent upon apartment 
rental income) would not qualify for this proposed exclusion.\46\
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    \46\ 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(b).
---------------------------------------------------------------------------

    Loans used solely to acquire undeveloped land for the purpose of 
constructing one- to four-family residential structures would not 
qualify for this proposed 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 proposed exclusion. A credit facility that 
combines the financing of land development and the construction of one- 
to four-family structures would qualify for this proposed exclusion.
    FCA did not receive any comments on this proposed exclusion and is 
adopting the exclusion as proposed.
b. Agricultural Land
    Under paragraph (2)(i)(C) of its proposed HVCRE definition, FCA 
proposed to exclude 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. FCA regulation Sec.  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.''
    The proposed exclusion applied 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 did not apply to loans for farm property 
construction or land development purposes.
    FCA intended its 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.\47\ 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 
``farmland'' loans, and therefore such loans do not fall within the 
FBRAs' agricultural land exclusion. Unlike the FBRAs, FCA proposed to 
expressly include within the agricultural land exclusion real estate 
that is an integral part of an aquatic operation.
---------------------------------------------------------------------------

    \47\ See Federal Financial Institutions Examination Council 
(FFIEC) 031 and FFIEC 041--Instructions for Preparation of 
Consolidated Reports of Condition and Income.
---------------------------------------------------------------------------

    As in the FBRAs' final rule, loans for land development purposes 
and farm property construction would not have been eligible in FCA's 
proposed rule for the agricultural land exclusion. 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.
    Exposures to land in transition--agricultural land in the path of 
development--were not automatically excluded from the definition of 
HVCRE through the proposed agricultural land exclusion. These exposures 
would need to be evaluated against the three criteria of the HVCRE 
definition discussed in Section II.C.1 of this preamble--Scope of HVCRE 
Exposure Definition--as well as all exclusions discussed in this 
preamble, to determine whether they are HVCRE exposures.
    FCA received several comments related to the proposed agricultural 
land exclusion. The System Comment Letter, and several other comment 
letters,\48\ highlighted the section of the proposed rule preamble that 
explained the exclusion would not apply to loans for farm property 
construction, including farm buildings. They stated that not applying 
the exclusion to the construction of farm buildings was contradictory 
to the underlying premise of the agricultural land exclusion and did 
not recognize the lower risk of these types of ``on-farm facilities.'' 
\49\ The letter requested that FCA add ``not related to on-going 
farming operations'' after the term ``farm buildings,'' indicating that 
the interdependent nature of System loan packages and the fact that 
farm construction projects are often related to ongoing farming 
operations reduces the risk of such projects.\50\
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    \48\ FCBT Letter dated January 24, 2022, Farm Credit of the 
Virginias, ACA Letter dated January 24, 2022, Capital Farm Credit, 
ACA Letter dated January 21, 2022, Farm Credit West, ACA Letter 
dated January 22, 2022 and Farm Credit of Florida, ACA Letter dated 
January 21, 2022.
    \49\ System Comment Letter dated January 19, 2022, page 3.
---------------------------------------------------------------------------

    As discussed above, the scope of FCA's proposed agricultural land 
exclusion was similar to that of the FBRAs' (except that FCA's proposed 
exclusion added exposures to real estate that is an integral part of an 
aquatic operation). The FBRAs' exclusion includes exposures to 
``farmland'' only and does not include loans for farm property 
construction. Therefore, the commenters' statement that not applying 
the exclusion to the

[[Page 25123]]

construction of farm buildings is contradictory to the underlying 
premise of the agricultural land exclusion is not correct.
    In response to the commenters' request that FCA expand the scope of 
the proposed exclusion to include the construction of farm buildings 
related to ongoing farming operations, FCA notes, as discussed in 
Section II.C.1 of this preamble--Scope of HVCRE Exposure Definition, 
that farm building construction projects where repayment of the credit 
facility will be from ongoing farming operations do not meet the third 
criterion of the proposed HVCRE definition and would not be subject to 
the increased risk weight. The third criterion is that repayment of the 
credit facility is dependent on the future income or sales proceeds, or 
refinancing of, the real property.\50\ This risk-weighting treatment 
reflects the lower relative risk characteristics of these exposures.
---------------------------------------------------------------------------

    \50\ As discussed in Section II.C.1 of this preamble--Scope of 
HVCRE Exposure Definition--in the case of revolver loans secured by 
land or real property where more than 50 percent of the proposed use 
of the revolver funds is for acquisition, development, or 
construction of real property, the entire revolver would be subject 
to the HVCRE definition if it also meets the other two criteria and 
is not subject to an exclusion.
---------------------------------------------------------------------------

    On the other hand, farm construction projects where repayment will 
depend on future income or the sales proceeds from the real property 
would meet the third criterion of the proposed HVCRE definition. Such 
projects have increased risk characteristics, justifying a higher risk 
weight compared to projects with repayment from ongoing operations. 
They would be assigned a higher risk weight under the FBRAs' rules and 
would be assigned a higher risk weight under FCA's proposed rule as 
well.
    In discussing the proposed Agricultural Land exclusion, the System 
Comment Letter, as well as two other letters,\51\ requested that FCA 
consider potential obstacles for YBS borrower entry into agriculture. 
These commenters stated that farm construction projects by YBS 
borrowers are often not part of ongoing farming operations and would 
potentially have higher costs of credit if subject to the 150 percent 
HVCRE risk weight. FCA believes excluding all YBS borrowers from the 
HVCRE risk weight would present safety and soundness concerns and 
detract from the objectives of this rule. However, as discussed in 
Section II.C.2.e of this preamble--Loans Originated for Less Than 
$500,000--the final rule includes an HVCRE exclusion for loans 
originated under $500,000, which will benefit some YBS borrowers.\52\
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    \51\ FCBT Letter dated January 24, 2022, and Farm Credit of 
Florida Letter dated January 21, 2022.
    \52\ Page 30 of the 2022 Annual Report of the Farm Credit 
Administration shows that for all three categories of YBS loans, the 
average size of loans outstanding as of December 31, 2022, and of 
loans made in 2022 was less than $500,000.
---------------------------------------------------------------------------

    For the reasons stated above, FCA is adopting as final, without 
change from the proposal, the agricultural land exclusion.
c. Loans on Existing Income Producing Properties That Qualify as 
Permanent Financings
    As in the FBRA rule, FCA proposed, in paragraph (2)(ii) of its 
definition of HVCRE exposure, to exclude 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. FCA also proposed, in part (2)(iii) of 
its definition of HVCRE, to exclude credit facilities financing 
improvements to existing income-producing real property secured by a 
mortgage on such property. The preamble to the proposed rule noted that 
examiners may review the reasonableness of a System institution's 
underwriting standards for permanent loans through the regular 
examination process to ensure the real estate lending policies are 
consistent with safe and sound banking practices.
    Under the proposal, loans such as agribusiness or rural project 
financing transactions, among other 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.
    Loans that are not secured by existing income-producing real 
property, however, would not fall under this proposed exclusion. Such 
loans often pose a greater credit risk than permanent loans. FCA 
believes it is appropriate to classify these loans as HVCRE exposures 
and impose a 150 percent risk weight given their increased risk 
characteristics compared to other commercial real estate exposures 
(unless the loan satisfies one of the other exclusions). However, as 
discussed in Section II.C.3 of this preamble--Reclassification as a 
Non-HVCRE Exposure, the proposal would allow a System institution to 
reclassify these HVCRE exposures as non-HVCRE exposures if they 
satisfied the two conditions in paragraph (6) of the proposed rule.
    FCA received one comment on the proposed exclusion for existing 
income producing properties that qualify as permanent financings. The 
System Comment Letter referenced a ``cash flow `test' '' to determine 
the sufficiency of the cash flow generated by real property to support 
the debt service and expenses.\53\ The Letter requested the test be 
conducted only once at loan origination and not be required again 
assuming the loan continues to pay as agreed. While neither the 
preamble to the proposed rule nor the rule text itself explicitly 
referenced a cash flow ``test'', FCA interprets the comment as 
reference to the underwriting analysis performed in determining whether 
a loan qualifies for this exclusion. The Agency is clarifying that once 
a loan has undergone this analysis at origination or purchase for the 
purpose of HVCRE classification, the institution does not need to 
reassess the loan again for that purpose. However, as with any 
permanent financing, the institution must have procedures in place for 
monitoring the ongoing quality of the loan. These procedures could 
include ongoing loan analysis.\54\
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    \53\ System Comment Letter dated January 19, 2022, page 3.
    \54\ FCA regulation Sec.  614.4170 outlines the responsibilities 
of direct lenders to service the loans they make, including having 
policies and procedures in place to preserve the quality of sound 
loans and help correct deficiencies as they develop.
---------------------------------------------------------------------------

    For the reasons stated above, FCA is adopting as final, without 
change from the proposal, the exclusion for loans on existing income 
producing properties that qualify as permanent financings.
d. Certain Commercial Real Property Projects
    As in the FBRA rule, FCA proposed, in paragraph (2)(iv) of its 
HVCRE definition, 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 future 
income. Commercial real property project loans do not include ordinary 
business loans and lines of credit in which real property is taken as

[[Page 25124]]

collateral. As it relates to the System, FCA believes this proposed 
exclusion is most relevant to agribusiness (processing and marketing 
entities and farm-related businesses) and rural project financing.
    To qualify for this proposed 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 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.
i. 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.\55\ 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.
---------------------------------------------------------------------------

    \55\ 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.\56\ 
Nevertheless, FCA examination guidance from 2009 makes clear that FCA 
expectations are consistent with the Interagency Guidelines, including 
the supervisory LTV limits.\57\ FCA believes exposures should satisfy 
these LTV limits to qualify for this proposed exclusion to the HVCRE 
definition. In paragraph (2)(iv)(A) of the final rule, the Agency 
proposed to adopt these LTV limits, for the purpose of the HVCRE 
definition only, in a new Appendix A to part 628.
---------------------------------------------------------------------------

    \56\ 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.
    \57\ Examination Bulletin FCA 2009-2, Guidance for Evaluating 
the Safety and Soundness of FCS Real Estate Lending (focusing on 
land in transition), December 2009.
---------------------------------------------------------------------------

    The System Comment Letter requested that FCA consider the potential 
impact of these proposed LTV limits on YBS lending. For the reasons 
discussed above, FCA is not providing an exclusion for all YBS 
borrowers. However, the final rule includes an HVCRE exclusion for 
loans originated under $500,000, which will benefit some YBS borrowers.
    For the reasons stated above, FCA is adopting as final this 
provision of the proposed rule.
ii. Contributed Capital
    Under paragraph (2)(iv)(B) and (C) of FCA's proposed definition of 
HVCRE exposures, borrowers must contribute capital of at least 15 
percent of the real property's value to the project to qualify for the 
commercial real property projects exclusion. 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.
    FCA's proposed rule required the value of contributed property to 
be determined in accordance with FCA regulations at Part 614, Subpart 
F, which are generally similar to the FIRREA standards adopted in the 
FBRA rule.\58\ Under the proposed rule, 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. In addition, the preamble to the 
proposed rule explained that contributed property or improvements would 
have to be ``directly related'' to the project to be eligible to count 
towards the capital contribution. As explained in that preamble, under 
the proposed rule real estate not developed as part of the project 
would not be counted toward the capital contribution. FCA received 
various comments on the contributed capital requirement of the proposed 
rulemaking which are addressed below.
---------------------------------------------------------------------------

    \58\ See FCA Informational Memorandum, Guidance on Addressing 
Personal and Intangible Property within Collateral Evaluation 
Policies and Procedures (Sec.  614.4245), August 29, 2016. On May 
20, 2021, FCA issued a proposed rule on collateral evaluation 
requirements (86 FR 27308). FCA's Fall 2023 Unified Agenda and 
Review of Significant Regulatory Actions, which the FCA Board 
approved on August 14, 2023, indicates that the agency will be 
considering a reproposed rule on collateral evaluation requirements 
in July 2024. Depending on the eventual outcome of the rulemaking, 
FCA's collateral standards could deviate from the FIRREA standards 
in the future.
---------------------------------------------------------------------------

Cross-Collateralized Real Property and ``Directly Related'' Collateral
    The System Comment Letter included a request for FCA to permit 
cross-collateralized real property or improvements to qualify as part 
of the capital contribution to an HVCRE project.\59\ The Letter 
referenced the common practice of System institutions cross-
collateralizing real estate collateral, and particularly the practice 
of a related party contributing collateral to support a loan to a YBS 
farmer so the farmer can obtain financing. The Letter explained that 
while the collateral might not be ``directly related'' to the project 
being financed, the collateral is pledged agricultural land integral to 
a borrower's overall operation and does not have the same risk profile 
as ``unrelated commercial development real estate projects.'' \60\
---------------------------------------------------------------------------

    \59\ The Farm Credit West, ACA Letter dated January 22, 2022, 
reiterated this comment. The CoBank Letter, dated January 20, 2021, 
asked for clarification on whether YBS loans, which often cross-
collateralize, would be exempted from the HVCRE definition.
    \60\ System Comment Letter dated January 19, 2022, page 4.
---------------------------------------------------------------------------

    In response to this comment, the Agency is confirming that cross-
collateralized property is permitted to count as a capital contribution 
to an HVCRE project. As explained in the preamble to the proposed rule, 
the value of the contributed real property must be reduced by the 
aggregate amount of any outstanding liens on the property for the 
purpose of calculating the 15 percent capital contribution.
    In addition, the Agency has reconsidered its regulatory 
interpretation in the preamble to the proposed rule that contributed 
real property or improvements must be ``directly related'' to the 
project. Under the final rule, other real property contributed to a 
project does not have to be ``directly related'' to the project to 
count as capital contributions for the purpose of the commercial real 
property projects exclusion.
    In not requiring real property to be ``directly related'' to a 
project to count towards the 15 percent capital

[[Page 25125]]

contribution for the purposes of excluding a project from the HVCRE 
definition, FCA is deviating from the FBRAs' interpretation of their 
final rule. After careful consideration, FCA does not believe that the 
relation of real property to a project materially impacts the risk 
associated with accessing System collateral. Requiring real property to 
be ``directly related'' to the project is therefore not a necessary 
safety and soundness criterion.
Readily Marketable Assets
    In line with the Interagency Guidelines for Real Estate Lending 
Policies,\61\ FCA, in its proposed rule, interpreted the term 
``unencumbered readily marketable assets'' to mean insured deposits, 
financial instruments, and bullion in which the System institution has 
a perfected interest. For assets 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.\62\
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    \61\ See 12 CFR part 365, subpart A, Appendix A (FDIC); 12 CFR 
part 208, Appendix C (FRB); 12 CFR part 34, Appendix A (OCC).
    \62\ This interpretation is consistent with the definitions of 
``unencumbered'' and ``marketable'' in FCA's liquidity regulation at 
Sec.  615.5134.
---------------------------------------------------------------------------

    The System Comment Letter asked FCA to clarify how often and to 
what extent institutions need to document that assets are readily 
marketable.\63\ For the purpose of qualifying as contributed capital 
for an HVCRE project, the assets must be deemed readily marketable at 
the time of loan origination only. The assessment to determine whether 
an asset is readily marketable should address the depth, breadth, and 
liquidity of the respective markets as well as other liquidity risk 
indicators.
---------------------------------------------------------------------------

    \63\ The Farm Credit West, ACA Letter dated January 22, 2022, 
reiterated this comment verbatim.
---------------------------------------------------------------------------

Abundance of Caution Collateral
    The System Comment letter also requested that FCA ``make a 
distinction on real estate collateral taken as abundance of caution for 
purposes of the 15% capital contribution requirement''.\64\ FCA 
regulation Sec.  614.4240(a) defines abundance of caution, when used to 
describe decisions to require collateral, as circumstances in which 
collateral is taken when (1) it is not required by statute, regulation, 
or institution policy, and (2) the extension of credit could have been 
made without taking the collateral.
---------------------------------------------------------------------------

    \64\ System Comment Letter dated January 19, 2022, page 4.
---------------------------------------------------------------------------

    Borrowers must make a 15 percent capital contribution that meets 
the criteria outlined in paragraph (2)(iv)(B) of this final rule, among 
other requirements, for their loan to qualify for this exclusion from 
the HVCRE definition. As discussed above, such collateral can be cross-
collateralized and does not have to be ``directly related'' to the 
project. Any collateral used to meet this requirement must satisfy the 
specified criteria, including collateral taken from the borrower in an 
abundance of caution.
YBS Borrowers
    The Agency considered the impact of the contributed capital 
requirements on YBS borrowers and, for the reasons discussed above, is 
not providing an exclusion for all YBS borrowers. However, the final 
rule includes an HVCRE exclusion for loans originated under $500,000, 
which will benefit some YBS borrowers.
    For the reasons stated above, FCA is adopting, as final, this 
provision of the proposed rule.
iii. Value Appraisal
    Under paragraph (2)(iv)(B) of FCA's proposed definition of HVCRE 
exposures, 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, when an ``as completed'' value 
appraisal is not available FCA proposed to permit the use of an ``as 
is'' appraisal.\65\ In addition, in its proposed rule FCA proposed to 
allow the use of a collateral evaluation of the real property in 
situations when the Agency's appraisal regulations \66\ permit 
collateral evaluations to be used in lieu of appraisals. As explained 
in the proposed rule preamble, FCA's approach to real property 
valuation deviates from the FBRAs' regulatory language but is 
consistent with their interpretation of the regulation.
---------------------------------------------------------------------------

    \65\ FCA intends 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.
    \66\ See Sec.  614.4260(c), which sets forth the types of real 
estate-related transactions that do not require appraisals.
---------------------------------------------------------------------------

    FCA did not receive any comments on this provision of the proposed 
rule and, as such, is adopting it as proposed.
iv. Project
    Under paragraph (2)(iv)(B) of FCA's proposed definition of HVCRE 
exposures, the 15 percent capital contribution and the appraisal or 
collateral evaluation would be measured in relation to a ``project.'' 
As discussed in the proposed rule preamble, FCA expects 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.
    FCA did not receive any comments on this provision of the proposed 
rule and, as such, is adopting it as proposed.
e. Loans Originated for Less Than $500,000
    FCA is adding an HVCRE exclusion to paragraph (2)(v) of the final 
rule for loans originated for less than $500,000. FCA recognizes the 
potential administrative burden of tracking loans of this size. As 
reported in the System's Annual Information Statement as of December 
30, 2022, 85 percent of System borrowers had at least one loan under 
$500,000,\67\ for the purpose of HVCRE classification. This exclusion 
maintains a balance between providing regulatory relief to System 
institutions and limiting the potential risk from HVCRE exposures.
---------------------------------------------------------------------------

    \67\ Page 57 of the 2022 Annual Information Statement of the 
Farm Credit System shows loans under $500,000 account for 85 percent 
of System borrowers and 16 percent of System loan volume at December 
31, 2022.
---------------------------------------------------------------------------

    The System Comment Letter asked FCA for consideration of YBS 
borrowers in the final rule. The Letter asserted that the loans of YBS 
applicants may be defined as HVCRE due to their reliance on third-party 
agreements for repayment and the fact that they are often not part of 
ongoing farming operations, and it stated that this classification 
could be an obstacle for YBS borrowers obtaining financing. The Letter 
also asked FCA to consider the impact of the LTV limits and capital 
contribution requirements in the commercial real property projects 
exclusion on YBS borrowers.
    FCA is committed to supporting the FCS's mission to serve YBS 
borrowers but the Agency must also ensure the

[[Page 25126]]

safety and soundness of the System. The addition of an exclusion for 
loans under $500,000 will benefit some YBS borrowers.\68\ In addition, 
many YBS borrowers and System borrowers in general will continue to 
have access to loan guarantees through programs such as the Farm 
Service Agency guarantee programs. The guaranteed portion of these 
loans will continue to receive a reduced risk weight in accordance with 
FCA's capital rules and will not be subject to the 150 percent risk 
weight for HVCRE exposures.\69\
---------------------------------------------------------------------------

    \68\ Page 30 of the 2022 Annual Report of the Farm Credit 
Administration shows that for all three categories of YBS loans, the 
average size of loans outstanding as of December 31, 2022, and of 
loans made in 2022 was less than $500,000.
    \69\ Under Sec.  628.32(a)(1)(i)(B) the portion of an exposure 
that is directly and unconditionally guaranteed by the U.S. 
Government, its central bank, or a U.S. Government agency is risk-
weighted at 0-percent. Under 628.32(a)(1)(ii) the portion of an 
exposure that is conditionally guaranteed by the U.S. Government, 
its central bank, or a U.S. Government agency is risk-weighted at 
20-percent.
---------------------------------------------------------------------------

    For the reasons discussed above, FCA is adding an exclusion for 
loans originated for less than $500,000 to the HVCRE definition.
f. Consideration of Additional Exclusions
    As detailed below, the System Comment Letter, as well as several 
other comment letters, asked FCA to consider various additional 
exclusions from the HVCRE definition.\70\ The requested exclusions 
included project financing of public and private facilities; 
agricultural production or processing facilities with contractual 
purchase agreements in place; minor improvements or alterations to real 
property; credit facilities where repayment would come from the 
borrower's ongoing business; and de minimis levels of financing. FCA 
considered each of these requested exclusions as discussed below.
---------------------------------------------------------------------------

    \70\ The Northwest Letter, dated January 24, 2022, encouraged 
FCA, without discussion, to consider all five exceptions proposed in 
the System Comment Letter.
---------------------------------------------------------------------------

i. Project Financing of Public and Private Facilities
    The System Comment Letter (supported by the Northwest Letter), the 
CoBank Letter, and the FCBT Letter requested an exclusion from the 
HVCRE definition for project financing of public and private 
facilities, such as rural infrastructure projects, where contractual 
agreements to purchase the product produced are in place before a 
facility is constructed. Commenters expressed concern that the proposed 
HVCRE definition would include System project financing, and therefore 
impact the financing of crucial rural infrastructure projects.
    The commenters stated that these projects may not have the 
necessary collateral support required by the proposed rule but 
highlighted mitigating factors against risk: the credit evaluation of a 
project independent of the sponsor, focus on the creditworthiness of 
counterparties to the contractual agreements, and the bankruptcy 
remoteness of the projects from their sponsors.\71\ They differentiated 
System project financings from other forms of corporate financing in 
which lenders evaluate the financial condition of corporate entities, 
not individual projects. In addition, they stated that the FBRAs' 
intent with the HVCRE risk weight was to capture speculative commercial 
real estate loans.
---------------------------------------------------------------------------

    \71\ FCA understands the commenters are referring to projects 
that are structured to be legally separate from the sponsor and not 
liable for the sponsors' debts in bankruptcy.
---------------------------------------------------------------------------

    As an initial matter, FCA notes that FCA Bookletter-070--Revised 
Capital Treatment for Certain Water and Wastewater Exposures--and 
Bookletter-053--Revised Regulatory Capital Treatment for Certain 
Electric Cooperatives--assign reduced risk weights to certain project 
financing exposures, including some exposures in the construction 
phase.\72\ Specifically, Bookletter-070 assigns a reduced risk weight 
to certain rural water and wastewater (RWW) construction exposures.\73\ 
Bookletter-053 assigns a reduced risk weight to certain electric 
cooperative construction loans for new baseload power plants. This rule 
will not affect the reduced risk weights for the project finance 
construction exposures that these bookletters assign, even for 
exposures that are HVCRE exposures.
---------------------------------------------------------------------------

    \72\ The reduced risk weights are lower than those that would 
otherwise apply under FCA regulation Sec.  628.32.
    \73\ In Section II.C.3. of this preamble--Reclassification as a 
Non-HVCRE Exposure--FCA explains revisions it plans to make to BL-
070 before this HVCRE rule becomes effective.
---------------------------------------------------------------------------

    In response to the comments regarding the standalone nature of 
System project financings, FCA agrees that this characteristic can be a 
risk mitigant to such projects in isolating them from any financial 
difficulties of their sponsors. However, the Agency also believes that 
the limited recourse to project sponsors could be to the detriment of 
such financings. If the project were to default, the lender could be 
limited to accessing the project's collateral, and any contributed 
capital, alone. They may not have any recourse to the project sponsor's 
assets. More importantly, project finance loans in the construction 
phase share many of the same risks as other construction loans 
regardless of recourse to project sponsors. These risks are discussed 
later in this section. FCA does not therefore believe that the 
independent nature of such financings is a sound enough reason alone to 
exclude these projects from the HVCRE definition. As discussed in 
Section II.C.3 of this preamble--Reclassification as a Non-HVCRE 
Exposure--the HVCRE risk weight no longer applies once the project is 
reclassified as non-HVCRE.
    The System Comment Letter also referenced the focus on the 
creditworthiness of contractual agreement counterparties as another 
risk mitigant to project financings. FCA agrees the creditworthiness of 
counterparties to the contractual agreements entered into by public and 
private projects is key to mitigating the risks of these projects. 
However, if a project depends on a counterparty's contractual payments 
to repay its construction phase debt, the inability of the counterparty 
to meet its obligations increases the risk that the project's loan will 
default. Counterparty credit risk cannot be avoided and can translate 
to elevated risk for construction loan projects heavily reliant on 
counterparties for repayment.
    FCA believes there are other risk factors to consider in relation 
to public and private facility project financing that justify inclusion 
of these credits in the HVCRE definition. In addition to the 
counterparty credit risk mentioned above, some additional risks include 
project delays, cost overruns, project obsolescence, contractor risk, 
and risks from shifting market dynamics.
    As discussed in Section II.C.1 of this preamble--Scope of HVCRE 
Exposure Definition--project delays and cost overruns have been a 
particular challenge to System construction loans recently, including 
in the project financing sector, and the impact in some cases has been 
material. If construction timelines and costs continue to be adversely 
affected, such supply chain issues could pose a credit risk to System 
institutions. The comment letters did not address these risks.
    Further, the reduced risk weights that Bookletter-070 and 
Bookletter-053 assign to RWW and electric cooperative construction 
exposures, as discussed above, do not support exempting all project 
finance construction exposures from HVCRE exposure risk weighting. The 
reduced risk weights for RWW and electric cooperative exposures, 
including exposures during the construction phase, are supported by 
unique characteristics of those

[[Page 25127]]

exposures that may not exist with other project finance exposures.
    As Bookletter-070 notes, RWW plays a critical role in agricultural 
and rural America, but its infrastructure is aging, and it can be 
difficult for rural communities to finance improvements. The services 
provided by RWW facilities are essential, which contributes to the 
overall strength and stability of the industry. Moreover, many RWW 
facilities are able to adjust rates as needed to support repayment, 
thus reducing the likelihood of default. FCA determined that a reduced 
risk weight for exposures that satisfied specified quantitative and 
qualitative safety and soundness criteria would provide more capacity 
for System institutions to provide RWW funding without taking on 
excessive risk. Similarly, the reduced risk weight for electric 
cooperatives that satisfy criteria specified in Bookletter-053 was 
supported by the unique characteristics and lower risk profile of the 
industry segment. The reduced risk weights assigned by bookletter to 
RWW and electric cooperative construction exposures do not support 
excluding project finance construction generally from the HVCRE risk 
weight.
    For the reasons stated above, FCA is not including a general 
exclusion for project financing in the final HVCRE rule. However, as 
discussed in Section II.5 of this preamble--Impact on Prior FCA Board 
Actions--certain project financing loans will not be subject to the 
HVCRE risk-weight under the provisions of Bookletter-053 and a revised 
Bookletter-070.
ii. Agricultural Production or Processing Facilities With Contractual 
Purchase Agreements in Place
    The System Comment Letter (supported by the Northwest Letter) asked 
for an explicit exclusion from the HVCRE definition for agricultural or 
processing facilities where contractual agreements are in place, prior 
to construction of the facility, to purchase the output from these 
facilities. The System Comment Letter specifically referenced ``loans 
to finance construction of poultry or other livestock barns that are 
originated with an integrator contract to support the lending 
structure.'' \74\ Poultry and other livestock facility construction 
projects are subject to the same risks as any construction project, 
namely project cost overruns and time delays. These risks are discussed 
in Section I.B.3 of this preamble--ADC Lending Risk and HVCRE Risk 
Weight. The commenters did not provide a risk-based justification, or 
any other justification, for excluding these types of loans from the 
HVCRE definition, and FCA does not believe such a justification exists.
---------------------------------------------------------------------------

    \74\ System Comment Letter dated January 19, 2022, page 5. The 
FCBT Letter dated January 24, 2022, reiterated the System Comment 
Letter's comment verbatim. The CoBank Letter, dated January 20, 
2021, summarized this comment, asking for clarification.
---------------------------------------------------------------------------

    The System Comment Letter did ask FCA to consider the potential 
impact on YBS borrowers by not providing an exclusion for loans with 
third-party integrator agreements. As explained in Section II.C.1 of 
this preamble--Scope of HVCRE Exposure Definition--a borrower dependent 
on payments from an integrator for repayment of debt would meet the 
criteria for classification as an HVCRE exposure unless the loan 
qualifies for an HVCRE exclusion. As a reminder, if repayment of the 
poultry or other livestock construction loan comes from the ongoing 
business of the borrower, the loan would not meet the HVCRE criteria. 
As discussed above, FCA is not providing an exclusion for all YBS 
borrowers. However, some YBS and other borrowers dependent on 
integrator agreements for loan repayment will benefit from the 
exclusion of loans under $500,000 from the definition of HVCRE in the 
final rule. In addition, YBS loans may have access to loan guarantees 
to reduce risk weights.
    For the reasons stated above, FCA is not adopting an HVCRE 
exclusion for agricultural or processing facilities where contractual 
agreements are in place.
iii. Minor Improvements or Alterations to Real Property
    The System Comment Letter (supported by the Northwest Letter) 
stated that FCA's proposed HVCRE definition included construction loans 
for ``additions or alterations'' regardless of materiality and 
requested an exclusion for minor improvements or alterations to real 
property.\75\ The letter indicated that unless a minor improvement 
request was a modification to an existing permanent financing it would 
be classified as HVCRE.
---------------------------------------------------------------------------

    \75\ The Farm Credit of Florida, ACA Letter, dated January 21, 
2022, repeated the System Comment Letter's comment verbatim.
---------------------------------------------------------------------------

    As an initial matter, the Letter's suggestion that if a minor 
improvement request is a modification to an existing permanent 
financing it would not be classified as an HVCRE exposure is not 
necessarily correct. As the preamble to the proposed rule explains, 
when a System institution modifies a loan or if a project is altered in 
a manner that materially \76\ changes the underwriting of a credit 
facility, the institution must treat the loan as a new exposure and 
must evaluate it to determine whether or not it is an HVCRE 
exposure.\77\
---------------------------------------------------------------------------

    \76\ Material changes may include 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.
    \77\ 86 FR 47601, 47606 (August 26, 2021).
---------------------------------------------------------------------------

    In response to the request for an exclusion for minor improvements 
or alterations to real property, the Agency's exclusion for loans under 
$500,000 will provide relief for these types of financings. In 
addition, the final rulemaking does have an exclusion for improvements 
to existing income producing improved real property if the cash flow 
generated by the property is sufficient to support the debt service and 
expenses of the real property in line with permanent financing 
criteria. Unless the loan to make minor improvements or alterations 
will be repaid from future income or sale of the project's real 
property, it would not fall under the definition of HVCRE.
    For the reasons stated above, FCA is not adopting an HVCRE 
exclusion for minor improvements or alterations to real property.
iv. Credit Facilities Where Repayment Would Be From the Ongoing 
Business of the Borrower
    The System Comment Letter (supported by the Northwest Letter) 
requested an explicit exclusion for credit facilities where repayment 
would come from the borrower's ongoing business.\78\ An explicit 
exclusion for these credit facilities is not warranted, because such an 
exclusion is clear from the existing regulatory language.
---------------------------------------------------------------------------

    \78\ The Farm Credit West, ACA Letter dated January 22, 2022 
reiterated this comment verbatim.
---------------------------------------------------------------------------

    The definition of HVCRE in the proposed rule includes a criterion 
that credit facilities where repayment is dependent on future income or 
the sale of the real estate would be considered HVCRE. Implicit in this 
criterion is that repayment from the ongoing business of the borrower 
would exclude a credit facility from being classified as HVCRE. In 
addition, in the preamble to the proposed rule, FCA explicitly stated 
that credit facilities that will be repaid from the borrower's ongoing 
business would not be classified as HVCRE.\79\ FCA does not believe 
changing the final rule to incorporate an explicit exclusion is 
warranted. Instead, FCA reiterates that a credit facility for which 
ongoing

[[Page 25128]]

income covers repayment would not meet the definition of HVCRE.
---------------------------------------------------------------------------

    \79\ 86 FR 47601, 47606 (August 26, 2021).
---------------------------------------------------------------------------

    For the reasons stated above, FCA is not adopting an HVCRE 
exclusion for credit facilities where repayment would be from the 
ongoing business of the borrower.
v. De Minimis Financings
    The System Comment Letter (supported by the Northwest Letter) asked 
FCA to consider an exclusion for a de minimis level of financing 
determined by each institution as a percentage of risk funds.\80\ The 
final rule includes an exclusion for loans under $500,000, which as 
discussed in Section II.C.2.e of this preamble--Loans Originated for 
Less Than $500,000--will provide administrative relief without 
introducing material risk exposure to the System. The Agency believes 
establishing a de minimis level as a percentage of capital or some 
other similar metric would allow for higher potential risk exposure 
than a dollar threshold would. Large institutions with considerable 
capital, for example, would be able to amass potentially material 
amounts of HVCRE volume if a capital-based threshold was set. The 
$500,000 exclusion would apply to all loans under $500,000 regardless 
of an institution's size or capital levels.
---------------------------------------------------------------------------

    \80\ The Farm Credit of Florida, ACA Letter, dated January 21, 
2022, and the Farm Credit West, ACA Letter, dated January 22, 2022, 
repeated the System Comment Letter's comment verbatim.
---------------------------------------------------------------------------

    For the reasons stated above, FCA is not adopting an HVCRE 
exclusion for de minimis financings.
3. 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. Each System institution should have prudent, clear, and 
measurable underwriting standards, which we may review through the 
examination process.
    The System Comment Letter requested FCA clarify its expectations 
for when an HVCRE project can be reclassified. The letter asked for 
clarification of ``the period that follows project completion to 
determine whether a projected cash flow is acceptable for purposes of 
reclassification.'' \81\ In addition, the letter requested further 
guidance on how to calculate projected cash flows for a property 
``owned by the business'' when these are not ``separately provided by 
the borrower''.\82\
---------------------------------------------------------------------------

    \81\ System Comment Letter, page 4.
    \82\ Id.
---------------------------------------------------------------------------

    As stated in the proposed rule, institutions should defer to their 
loan underwriting criteria for permanent financings when determining if 
an HVCRE exposure is generating sufficient cash flow to support the 
debt service and expenses of the real property. FCA does not have an 
expectation for a specific period following project completion to 
demonstrate adequate cash flows. Such a criterion should be clearly 
stated in an institution's loan underwriting standards. Similarly, the 
Agency is not specifying in the final rule how to calculate cash flows. 
Regardless of how cash flow information is presented by a borrower, the 
institution should have processes in place to adequately analyze and 
project cash flows.
    FCA is adopting this part of the proposed rule without change.
4. Applicability Only to Loans Made After January 1, 2025
    In consideration of the changes this rule would require, only loans 
made after January 1, 2025, the planned effective date of this rule, 
would be subject to the HVCRE risk-weighting requirements. Loans made 
prior to January 1, 2025 could continue to be risk-weighted as they are 
under the pre-existing version of the rule.
    After January 1, 2025, 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.
5. Impact on Prior FCA Board Actions
    Existing FCA Bookletter BL-070 authorizes System institutions to 
assign a 50- or 75-percent risk weight for RWW facilities that satisfy 
certain criteria, but it does not permit these risk weights for 
exposures when a RWW facility is not fully operational due to initial 
construction or major renovation. RWW exposures subject to a 50- or 75-
percent risk weight under BL-070 will continue to receive these risk 
weights after this HVCRE rule becomes effective.
    Bookletter-070 currently provides that exposures not subject to the 
50- or 75-percent risk weight are assigned risk weights in accordance 
with Part 628 of FCA's regulations. Because this HVCRE rule is not yet 
in effect, these exposures are currently risk weighted at 100-percent 
as corporate exposures under Sec.  628.32(f)(1) when they are in the 
construction phase. However, as this bookletter is currently written, 
once the HVCRE risk weight becomes effective such construction 
exposures would be assigned the HVCRE risk weight if the HVCRE 
definition were met and no exclusions applied.
    Before the rule's planned effective date of January 1, 2025 (which 
is before BL-070's existing sunset date of November 2025), FCA plans to 
revise BL-070 to provide that RWW construction exposures not subject to 
a 50-or 75-percent risk weight under the bookletter will continue to be 
risk-weighted as corporate exposures. FCA plans to revise the risk 
weight of these exposures because of the unique characteristics of RWW 
exposures discussed above.
    Similarly, electric cooperative exposures assigned 20- or 50-
percent risk weights under FCA Bookletter BL-053, including exposures 
to some power plants that are in the construction phase, will continue 
to receive these risk weights under the bookletter even after this rule 
becomes effective. Under the bookletter, electric cooperative exposures 
that are not assigned a 20- or 50-percent risk weight are subject to 
the ``current'' (as of the 2007 adoption of the bookletter) regulatory 
risk weight under former Sec.  615.5211,\83\ which was 100 percent.\84\ 
Therefore, under the bookletter, electric cooperative construction 
exposures that are not assigned a 20- or 50-percent risk weight will be 
assigned a 100 percent risk weight and will not be subject to risk 
weights in Part 628 (including the new HVCRE risk weight).
---------------------------------------------------------------------------

    \83\ FCA rescinded Sec.  615.5211 when the capital rule it 
adopted in 2016, including the risk weights in Sec.  628.32, became 
effective on January 1, 2017.
    \84\ Under former Sec.  615.5211(d) as it existed in 2007, the 
100-percent risk weight category comprised standard risk assets such 
as those typically found in a loan or lease portfolio. In addition, 
former Sec.  615.5211(d)(1) provided that the 100-percent risk 
weight category included all claims on private obligors that were 
not included in another category and Sec.  615.5211(12) provided 
that the category included all other assets not specified elsewhere.

---------------------------------------------------------------------------

[[Page 25129]]

III. Regulatory Analysis

A. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies the final 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.

B. Congressional Review Act

    Under the provisions of the Congressional Review Act (5 U.S.C. 801 
et seq.), the Office of Management and Budget's Office of Information 
and Regulatory Affairs has determined that this final rule is not a 
``major rule'' as the term is defined at 5 U.S.C. 804(2).

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, the Farm Credit 
Administration amends part 628 of chapter VI, title 12 of the Code of 
Federal Regulations 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, as amended 
by sec. 301(a), Pub. L. 103-399, 102 Stat 989, 993 (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.
    (v) Loans originated for less than $500,000.
    (3) An HVCRE exposure does not include any loan made prior to 
January 1, 2025.
    (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

[[Page 25130]]


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 read as 
follows:


Sec.  628.63  Disclosures.

* * * * *

               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 limit
                  Loan category                          (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: March 29, 2024.
Ashley Waldron,
Secretary to the Board, Farm Credit Administration.
[FR Doc. 2024-07060 Filed 4-9-24; 8:45 am]
BILLING CODE 6705-01-P