Real Estate Lending Standards
| Published date | 25 June 2021 |
| Citation | 86 FR 33570 |
| Record Number | 2021-12973 |
| Section | Proposed rules |
| Court | Federal Deposit Insurance Corporation |
Federal Register, Volume 86 Issue 120 (Friday, June 25, 2021)
[Federal Register Volume 86, Number 120 (Friday, June 25, 2021)]
[Proposed Rules]
[Pages 33570-33574]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-12973]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 365
RIN 3064-AF72
Real Estate Lending Standards
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking and request for comment.
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SUMMARY: The FDIC is inviting comment on a proposed rule to amend
Interagency Guidelines for Real Estate Lending Policies (Real Estate
Lending Standards). The purpose of the proposed rule is to align the
Real Estate Lending Standards with the community bank leverage ratio
(CBLR) rule, which does not require electing institutions to calculate
tier 2 capital or total capital. The proposed rule would allow a
consistent approach for calculating the ratio of loans in excess of the
supervisory loan-to-value limits (LTV Limits) at all FDIC-supervised
institutions, using a methodology that approximates the historical
methodology the FDIC has followed for calculating this measurement
without requiring institutions to calculate tier 2 capital. The
proposed rule would also avoid any regulatory burden that could arise
if an FDIC-supervised institution subsequently decides to switch
between different capital frameworks.
DATES: Comments must be received by July 26, 2021.
ADDRESSES: Interested parties are encouraged to submit written
comments. Commenters should use the title ``Real Estate Lending
Standards (RIN 3064-AF72)'' to facilitate the organization of comments.
Interested parties are invited to submit written comments, identified
by RIN 3064-AF72, by any of the following methods:
FDIC website: https://www.fdic.gov/resources/regulations/federal-register-publications/.
Mail: James P. Sheesley, Assistant Executive Secretary,
Attention: Comments/Legal ESS (RIN 3064-AF72), Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
Hand Delivery/Courier: The guard station at the rear of
the 550 17th Street NW, building (located on F Street) on business days
between 7:00 a.m. and 5:00 p.m.
Email: [email protected]. Comments submitted must include
``RIN 3064-AF72.''
Please include your name, affiliation, address, email address, and
telephone number(s) in your comment. All statements received, including
attachments and other supporting materials, are part of the public
record and are subject to public disclosure. You should submit only
information that you wish to make publicly available.
Please note: All comments received will be posted generally without
change to https://www.fdic.gov/resources/regulations/federal-register-publications/, including any personal information provided.
FOR FURTHER INFORMATION CONTACT:
Alicia R. Marks, Examination Specialist, Division of Risk
Management and Supervision, (202) 898-6660, [email protected]; Navid K.
Choudhury, Counsel, (202) 898-6526, or Catherine S. Wood, Counsel,
(202) 898-3788, Federal Deposit Insurance Corporation, 550 17th Street
NW, Washington, DC 20429. For the hearing impaired only, TDD users may
contact (202) 925-4618.
[[Page 33571]]
SUPPLEMENTARY INFORMATION:
I. Policy Objectives
The policy objective of the proposed rule is to provide consistent
calculations of the ratios of loans in excess of the supervisory LTV
Limits between banking organizations that elect, and those that do not
elect, to adopt the CBLR framework, while not including capital ratios
that some institutions are not required to compute or report. The
proposed rule would amend the Real Estate Lending Standards set forth
in Appendix A of 12 CFR part 365.
Section 201 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA) directs the FDIC, the Board of Governors of
the Federal Reserve System (FRB), and the Office of the Comptroller of
the Currency (OCC) (collectively, the agencies) to develop a community
bank leverage ratio for qualifying community banking organizations. The
CBLR framework is intended to simplify regulatory capital requirements
and provide material regulatory compliance burden relief to the
qualifying community banking organizations that opt into it. In
particular, banking organizations that opt into the CBLR framework do
not have to calculate the metrics associated with the applicable risk-
based capital requirements in the agencies' capital rules (generally
applicable rule), including total capital.
The Real Estate Lending Standards set forth in Appendix A of 12 CFR
part 365, as they apply to FDIC-supervised banks, contain a tier 1
capital threshold for institutions electing to adopt the CBLR and a
total capital threshold for other banks. The proposed rule would
provide a consistent treatment for all FDIC-supervised banks without
requiring the computation of total capital. The proposed amendment is
described in more detail in Section III, below.
II. Background
The Real Estate Lending Standards, which were issued pursuant to
section 304 of the Federal Deposit Insurance Corporation Improvement
Act of 1991, 12 U.S.C. 1828(o), prescribe standards for real estate
lending to be used by FDIC-supervised institutions in adopting internal
real estate lending policies. Section 201 of the EGRRCPA amended
provisions in the Dodd-Frank Wall Street Reform and Consumer Protection
Act relative to the capital rules administered by the agencies. The
CBLR rule was issued by the agencies to implement section 201 of the
EGRRCPA, and it provides a simple measure of capital adequacy for
community banking organizations that meet certain qualifying
criteria.\1\ The FDIC is issuing this proposal to amend part 365 in
response to changes in the type of capital information available after
the implementation of the CBLR rule. Qualifying community banking
organizations \2\ that elect to use the CBLR framework (Electing CBOs)
may calculate their CBLR without calculating tier 2 capital, and are
therefore not required to calculate or report tier 2 capital or total
capital.\3\ The proposed revision to the Real Estate Lending Standards
would allow a consistent approach for calculating loans in excess of
the supervisory LTV Limits without having to calculate tier 2 or total
capital as currently included in part 365 and its Appendix.
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\1\ 85 FR 64003 (Oct. 9, 2020).
\2\ The FDIC's CBLR rule defines qualifying community banking
organizations as ``an FDIC-supervised institution that is not an
advanced approaches FDIC-supervised institution'' with less than $10
billion in total consolidated assets that meet other qualifying
criteria, including a leverage ratio (equal to tier 1 capital
divided by average total consolidated assets) of greater than 9
percent. 12 CFR 324.12(a)(2).
\3\ Total capital is defined as the sum of tier 1 capital and
tier 2 capital. See 12 CFR 324.2.
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The proposal would also ensure that the FDIC's regulation regarding
supervisory LTV Limits is consistent with how examiners are calculating
credit concentrations, as provided by a statement issued by the
agencies on March 30, 2020. The statement provided that the agencies'
examiners will use tier 1 capital plus the appropriate allowance for
credit losses as the denominator when calculating credit
concentrations.\4\
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\4\ See the Joint Statement on Adjustment to the Calculation for
Credit Concentration Ratios (FIL-31-2020).
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III. Revisions to the Real Estate Lending Standards
The FDIC is proposing to amend the Real Estate Lending Standards so
all FDIC-supervised institutions, both Electing CBOs and other insured
financial institutions, would calculate the ratio of loans in excess of
the supervisory LTV Limits using tier 1 capital plus the appropriate
allowance for credit losses \5\ in the denominator. The proposed
amendment would provide a consistent approach for calculating the ratio
of loans in excess of the supervisory LTV Limits for all FDIC-
supervised institutions. The proposed amendment would also approximate
the historical methodology specified in the Real Estate Lending
Standards for calculating the loans in excess of the supervisory LTV
Limits without creating any regulatory burden for Electing CBOs and
other banking organizations.\6\ Further, the FDIC is proposing this
approach to provide regulatory clarity and avoid any regulatory burden
that could arise if Electing CBOs subsequently decide to switch between
the CBLR framework and the generally applicable capital rules. The FDIC
is proposing to amend the Real Estate Lending Standards only relative
to the calculation of loans in excess of the supervisory LTV Limits due
to the change in the type of capital information that will be
available, and is not considering any revisions to other sections of
the Real Estate Lending Standards. Additionally, due to a publishing
error which excluded the third paragraph in this section in the Code of
Federal Regulations in prior versions, the FDIC is including the
complete text of the section on loans in excess of the supervisory
loan-to-value limits.
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\5\ Banking organizations that have not adopted the current
expected credit losses (CECL) methodology will use tier 1 capital
plus the allowance for loan and lease losses (ALLL) as the
denominator. Banking organizations that have adopted the CECL
methodology will use tier 1 capital plus the portion of the
allowance for credit losses (ACL) attributable to loans and leases.
\6\ The proposed amendment approximates the historical
methodology in the sense that both the proposed and historical
approach for calculating the ratio of loans in excess of the LTV
Limits involve adding a measure of loss absorbing capacity to tier 1
capital, and an institution's ALLL (or ACL) is a component of tier 2
capital. Under the agencies' capital rules an institution's entire
amount of ALLL or ACL could be included in its tier 2 capital,
depending on the amount of its risk-weighted assets base. Based on
December 31, 2019, Call Report data--the last Call Report date prior
to the introduction of the CBLR framework--96.0 percent of FDIC-
supervised institutions reported that their entire ALLL or ACL was
included in their tier 2 capital, and 50.5 percent reported that
their tier 2 capital was entirely composed of their ALLL.
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IV. Expected Effects
As of September 30, 2020, the FDIC supervises 3,245 insured
depository institutions. The proposed revision to the Real Estate
Lending Standards, if adopted, would apply to all FDIC-supervised
institutions. The effect of the proposed revisions at an individual
bank would depend on whether the amount of its current or future real
estate loans with loan-to-value ratios that exceed the supervisory LTV
thresholds is greater than, or less than, the sum of its tier 1 capital
and allowance (or credit reserve in the case of CECL adopters) for loan
and lease losses. Allowance levels, credit reserves, and the volume of
real estate loans and their loan to value ratios can vary considerably
over time. Moreover, the FDIC does not have comprehensive information
about the distribution of current loan to value ratios. For these
[[Page 33572]]
reasons, it is not possible to identify how many institutions have real
estate loans that exceed the supervisory LTV thresholds that would be
directly implicated by either the current Real Estate Lending Standards
or the proposed revisions.
Currently, 3,080 FDIC supervised institutions have total real
estate loans that exceed the tier 1 capital plus allowance or reserve
benchmark in the proposed revision and are thus potentially affected by
the proposed revisions depending on the distribution of their loan to
value ratios. In comparison, 3,088 FDIC supervised institutions have
total real estate loans exceeding the current total capital benchmark
and are thus potentially affected by the current Real Estate Lending
Standards. As described in more detail below, the population of banks
potentially subject to the Real Estate Lending Standards is therefore
almost unchanged by these proposed revisions, and their substantive
effects are likely to be minimal.\7\
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\7\ September 30, 2020, Call Report data.
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The FDIC believes that a threshold of ``tier 1 capital plus an
allowance for credit losses'' is consistent with the way the FDIC and
institutions historically have applied the Real Estate Lending
Standards. Also, the typical (or median) FDIC-supervised institution
that had not elected the CBLR framework reported no difference between
the amount of its allowance for credit losses and its tier 2
capital.\8\ Consequently, although the FDIC does not have information
about the amount of real estate loans at each institution that
currently exceeds, or could exceed, the supervisory LTV limits, the
FDIC does not expect the proposed rule to have material effects on the
safety-and-soundness of, or compliance costs incurred by, FDIC-
supervised institutions.
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\8\ September 30, 2020, Call Report data.
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V. Alternatives
The FDIC considered two alternatives, however it believes that none
are preferable to the proposal. The alternatives are discussed below.
First, the FDIC considered making no change to its Real Estate
Lending Standards. The FDIC is not in favor of this approach because
the FDIC does not favor an approach in which some banks use a tier 1
capital threshold and other banks use a total capital threshold, and
because the existing provision could be confusing for institutions.
Second, the FDIC considered revising its Real Estate Lending
Standards so that both Electing CBOs and other institutions would use
tier 1 capital in place of total capital for the purpose of calculating
the supervisory LTV Limits. While this would subject both Electing CBOs
and other institutions to the same approach, because the amount of tier
1 capital at an institution is typically less than the amount of total
capital, this alternative would result in a relative tightening of the
supervisory standards with respect to loans made in excess of the
supervisory LTV Limits. The FDIC believes that the general level of the
current supervisory LTV Limits, which would be retained by this
proposed rule, is appropriately reflective of the safety and soundness
risk of depository institutions, and therefore the FDIC does not
consider this alternative preferable to the proposed rule.
VI. Request for Comments
The FDIC invites comment on all aspects of the proposed rule. In
particular, the FDIC invites comment on the use of tier 1 capital plus
the appropriate allowance for credit losses in the denominator to
calculate the level of loans in excess of the supervisory LTV Limits.
Additionally, what alternative capital metric for the denominator when
calculating loans in excess of the supervisory LTV Limits should the
FDIC consider?
IV. Regulatory Analysis
A. Proposed Waiver of Delayed Effective Date
The FDIC proposes to make all provisions of the rule effective upon
publication of the final rule in the Federal Register. The
Administrative Procedure Act (APA) allows for an effective date of less
than 30 days after publication ``as otherwise provided by the agency
for good cause found and published with the rule.'' \9\ The purpose of
the 30-day waiting period prescribed in APA section 553(d)(3) is to
give affected parties a reasonable time to adjust their behavior and
prepare before the final rule takes effect. The FDIC believes that this
waiting period would be unnecessary as the proposed rule, if codified,
would likely lift burdens on FDIC-supervised institutions by allowing
them to calculate the ratio of loans in excess of the supervisory LTV
Limits without calculating tier 2 capital, and would also ensure that
the approach is consistent, regardless of the institutions' CBLR
election status. Consequently, the FDIC believes it would have good
cause for the final rule to become effective upon publication.
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\9\ 5 U.S.C. 553(d)(3).
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The FDIC invites comment on whether good cause exists to waive the
delayed effective date of the rule once finalized.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a proposed rule, an agency prepare and make available
for public comment an initial regulatory flexibility analysis that
describes the impact of the proposed rule on small entities.\10\
However, a regulatory flexibility analysis is not required if the
agency certifies that the rule will not have a significant economic
impact on a substantial number of small entities, and publishes its
certification and a short explanatory statement in the Federal Register
together with the rule. The Small Business Administration (SBA) has
defined ``small entities'' to include banking organizations with total
assets of less than or equal to $600 million.\11\ Generally, the FDIC
considers a significant effect to be a quantified effect in excess of 5
percent of total annual salaries and benefits per institution, or 2.5
percent of total noninterest expenses. The FDIC believes that effects
in excess of these thresholds typically represent significant effects
for FDIC-supervised institutions. For the reasons provided below, the
FDIC certifies that the proposed rule will not have a significant
economic impact on a substantial number of small banking organizations.
Accordingly, a regulatory flexibility analysis is not required.
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\10\ 5 U.S.C. 601 et seq.
\11\ The SBA defines a small banking organization as having $600
million or less in assets, where ``a financial institution's assets
are determined by averaging the assets reported on its four
quarterly financial statements for the preceding year.'' 13 CFR
121.201 n.8 (2019). ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates. . . .'' 13 CFR 121.103(a)(6)
(2019). Following these regulations, the FDIC uses a covered
entity's affiliated and acquired assets, averaged over the preceding
four quarters, to determine whether the covered entity is ``small''
for the purposes of RFA.
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As of September 30, 2020, the FDIC supervised 3,245 institutions,
of which 2,434 were ``small entities'' for purposes of the RFA.\12\ The
effect of the proposed revisions at an individual bank would depend on
whether the amount of its current or future real estate loans with
loan-to-value ratios that exceed the supervisory LTV thresholds is
greater than, or less than, the sum of its tier 1 capital and allowance
(or credit reserve in the case of CECL adopters) for loan and lease
losses. Allowance levels, credit reserves, and the volume of real
estate loans and their loan to value ratios can vary considerably over
time. Moreover, the FDIC does not have
[[Page 33573]]
comprehensive information about the distribution of current loan to
value ratios. For these reasons, it is not possible to identify how
many institutions have real estate loans that exceed the supervisory
LTV thresholds that would be directly implicated by either the current
Guidelines or the proposed revisions.
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\12\ September 30, 2020, Call Report data.
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Currently, 2,305 small, FDIC supervised institutions have total
real estate loans that exceed the tier 1 capital plus allowance or
reserve benchmark in the proposed revision and are thus potentially
affected by the proposed revisions depending on the distribution of
their loan to value ratios. In comparison, 2,312 small, FDIC supervised
institutions have total real estate loans exceeding the current total
capital benchmark and are thus potentially affected by the current Real
Estate Lending Standards. As described in more detail below, the
population of banks potentially subject to the Real Estate Lending
Standards is therefore almost unchanged by these proposed revisions,
and their substantive effects are likely to be minimal.\13\
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\13\ Id.
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The FDIC believes that a threshold of ``tier 1 capital plus an
allowance for credit losses'' is consistent with the way the FDIC and
institutions historically have applied the Real Estate Lending
Standards. Also, the typical (or median) small, FDIC-supervised
institution that had not elected the CBLR framework reported no
difference between the amount of its allowance for credit losses and
its tier 2 capital.\14\ Consequently, although the FDIC does not have
information about the amount of real estate loans at each small
institution that currently exceeds, or could exceed, the supervisory
LTV limits, the FDIC does not expect the proposed rule to have material
effects on the safety-and-soundness of, or compliance costs incurred
by, small FDIC-supervised institutions. However, small institutions may
have to incur some costs associated with making the necessary changes
to their systems and processes in order to comply with the terms of the
proposed rule. The FDIC believes that any such costs are likely to be
minimal given that all small institutions already calculate tier 1
capital and the allowance for credit losses and had been subject to the
previous thresholds for many years before the changes in the capital
rules.
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\14\ Id.
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Therefore, and based on the preceding discussion, the FDIC
certifies that the proposed rule, if codified as written, would not
significantly affect a substantial number of small entities.
The FDIC invites comments on all aspects of the supporting
information provided in this section, and in particular, whether the
proposed rule would have any significant effects on small entities that
the FDIC has not identified.
C. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA),\15\ the FDIC may not conduct or sponsor, and a
respondent is not required to respond to, an information collection
unless it displays a currently-valid Office of Management and Budget
(OMB) control number. The FDIC has reviewed this proposed rule and
determined that it would not introduce any new or revise any collection
of information pursuant to the PRA. Therefore, no submissions will be
made to OMB with respect to this proposed rule.
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\15\ 44 U.S.C. 3501-3521.
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D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\16\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institution, each Federal banking agency must
consider, consistent with principles of safety and soundness and the
public interest, any administrative burdens that such regulations would
place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on insured
depository institutions generally to take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in final form.\17\
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\16\ 12 U.S.C. 4802(a).
\17\ Id. at 4802(b).
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The FDIC believes that this proposed rule, if implemented, would
not impose new reporting, disclosure, or other requirements, and would
likely instead reduce such burdens by allowing Electing CBOs to avoid
calculating and reporting tier 2 capital, as would be required under
the current Real Estate Lending Standards. Additionally, even if this
proposed rule could be considered subject to the requirements of
section 302(b) of RCDRIA, the FDIC believes that there is good cause
under section 302(b)(1)(A) to have the rule become effective upon
publication in the Federal Register for the same reasons that it
believes good cause exists under the APA (see Proposed Waiver of
Delayed Effective Date, supra). The FDIC invites comment on the
applicability of section 302(b) of RCDRIA to the proposed rule and, if
it is applicable, whether good cause exists to waive the delayed
effective date of the rule once finalized.
E. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act \18\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The FDIC has sought to present the
proposed rule in a simple and straightforward manner and invites
comment on the use of plain language.
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\18\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
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List of Subjects in 12 CFR Part 365
Banks, Banking, Mortgages, Savings associations.
PART 365--REAL ESTATE LENDING STANDARDS
Authority and Issuance
For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation proposes to amend part 365 of chapter III of
title 12 of the Code of Federal Regulations as follows:
0
1. The authority citation for part 365 continues to read as follows:
Authority: 12 U.S.C. 1828(o) and 5101 et seq.
0
2. Amend Appendix A to Subpart A by revising the section titled ``Loans
in Excess of the Supervisory Loan-to-Value Limits'' to read as follows:
Appendix A to Subpart A of Part 365--Interagency Guidelines for Real
Estate Lending Policies
* * * * *
Loans in Excess of the Supervisory Loan-to-Value Limits
The agencies recognize that appropriate loan-to-value limits
vary not only among categories of real estate loans but also among
individual loans. Therefore, it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in
excess of the supervisory loan-to-value limits, based on the support
provided by other credit factors. Such loans should be identified in
the institution's records, and
[[Page 33574]]
their aggregate amount reported at least quarterly to the
institution's board of directors. (See additional reporting
requirements described under ``Exceptions to the General Policy.'')
The aggregate amount of all loans in excess of the supervisory
loan-to-value limits should not exceed 100 percent of total
capital.\4\ Moreover, within the aggregate limit, total loans for
all commercial, agricultural, multifamily or other non-1-to-4 family
residential properties should not exceed 30 percent of total
capital. An institution will come under increased supervisory
scrutiny as the total of such loans approaches these levels.
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\4\ For the purposes of these Guidelines, for state non-member
banks and state savings associations, ``total capital'' refers to
the FDIC-supervised institution's tier 1 capital, as defined in
Sec. 324.2 of this chapter, plus the allowance for loan and leases
losses or the allowance for credit losses attributable to loans and
leases, as applicable. The allowance for credit losses attributable
to loans and leases is applicable for institutions that have adopted
the Current Expected Credit Losses methodology.
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In determining the aggregate amount of such loans, institutions
should: (a) Include all loans secured by the same property if any
one of those loans exceeds the supervisory loan-to-value limits; and
(b) include the recourse obligation of any such loan sold with
recourse. Conversely, a loan should no longer be reported to the
directors as part of aggregate totals when reduction in principal or
senior liens, or additional contribution of collateral or equity
(e.g., improvements to the real property securing the loan), bring
the loan-to-value ratio into compliance with supervisory limits.
* * * * *
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on June 15, 2021.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2021-12973 Filed 6-24-21; 8:45 am]
BILLING CODE 6714-01-P
