Regulatory Capital Rules: Treatment of Land Development Loans for the Definition of High Volatility Commercial Real Estate Exposure

 
CONTENT
Federal Register, Volume 84 Issue 141 (Tuesday, July 23, 2019)
[Federal Register Volume 84, Number 141 (Tuesday, July 23, 2019)]
[Proposed Rules]
[Pages 35344-35352]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15332]
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Proposed Rules
                                                Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 84, No. 141 / Tuesday, July 23, 2019 /
Proposed Rules
[[Page 35344]]
DEPARTMENT OF TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID OCC-2018-0026]
RIN 1557-AE48
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Regulation Q; Docket No. R-1669]
RIN 7100-AF53
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AF06
Regulatory Capital Rules: Treatment of Land Development Loans for
the Definition of High Volatility Commercial Real Estate Exposure
AGENCY: Office of the Comptroller of the Currency, Treasury; the Board
of Governors of the Federal Reserve System; and the Federal Deposit
Insurance Corporation.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation (collectively, the agencies) are issuing a notice
of proposed rulemaking (proposal) to seek comment on the treatment of
loans that finance the development of land for purposes of the one- to
four-family residential properties exclusion in the definition of high
volatility commercial real estate (HVCRE) exposure in the agencies'
regulatory capital rule. This proposal expands upon the notice of
proposed rulemaking (HVCRE NPR) issued on September 28, 2018, which
proposed to revise the definition of HVCRE exposure in the regulatory
capital rule to conform to the statutory definition of ``high
volatility commercial real estate acquisition, development, or
construction (HVCRE ADC) loan,'' in accordance with section 214 of the
Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA).
DATES: Comments must be received by August 22, 2019.
ADDRESSES: Comments should be directed to:
    OCC: You may submit comments to the OCC by any of the methods set
forth below. Commenters are encouraged to submit comments through the
Federal eRulemaking Portal or email, if possible. Please use the title
``Regulatory Capital Rules: Treatment of Land Development Loans for the
Definition of High Volatility Commercial Real Estate Exposure'' to
facilitate the organization and distribution of the comments. You may
submit comments by any of the following methods:
     Federal eRulemaking Portal--``regulations.gov'': Go to
www.regulations.gov. Enter ``Docket ID OCC-2018-0026'' in the Search
Box and click ``Search.'' Click on ``Comment Now'' to submit public
comments. Click on the ``Help'' tab on the Regulations.gov home page to
get information on using Regulations.gov, including instructions for
submitting public comments.
     Email: [email protected].
     Mail: Chief Counsel's Office, Office of the Comptroller of
the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2018-0026'' in your comment. In general, the OCC will
enter all comments received into the docket and publish them on the
Regulations.gov website without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not include any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to
this rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to
www.regulations.gov. Enter ``Docket ID OCC-2018-0026'' in the Search
box and click ``Search.'' Click on ``Open Docket Folder'' on the right
side of the screen and then ``Comments.'' Comments and supporting
materials can be filtered by clicking on ``View all documents and
comments in this docket'' and then using the filtering tools on the
left side of the screen. Click on the ``Help'' tab on the
Regulations.gov home page to get information on using Regulations.gov.
The docket may be viewed after the close of the comment period in the
same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For
security reasons, the OCC requires that visitors make an appointment to
inspect comments. You may do so by calling (202) 649-6700 or, for
persons who are hearing impaired, TTY, (202) 649-5597. Upon arrival,
visitors will be required to present valid government-issued photo
identification and submit to security screening in order to inspect
comments.
    Board: You may submit comments, identified by Docket No. R-1669, by
any of the following methods:
     Agency website: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket
number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551. All public comments will be made available on the
Board's website at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or
to remove personally identifiable information at the commenter's
request. Accordingly,
[[Page 35345]]
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room 146, 1709 New York Avenue, Washington, DC 20006
between 9:00 a.m. and 5:00 p.m. on weekdays.
    FDIC: You may submit comments, identified by RIN 3064-AF06, by any
of the following methods:
     Agency website: https://www.fdic.gov/regulations/laws/federal/index.html. Follow instructions for submitting comments on the
FDIC website.
     Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
     Hand Delivered/Courier: Comments may be hand-delivered to
the guard station at the rear of the 550 17th Street Building (located
on F Street) on business days between 7:00 a.m. and 5:00 p.m.
     Email: [email protected]. Include RIN 3064-AF06 on the
subject line of the message.
     Public Inspection: All comments received must include the
agency name and RIN 3064-AF06 for this rulemaking. All comments
received will be posted without change to https://www.fdic.gov/regulations/laws/federal/index.html, including any personal information
provided. Paper copies of public comments may be ordered from the FDIC
Public Information Center, 3501 North Fairfax Drive, Room E-1002,
Arlington, VA 22226, or by telephone at (877) 275-3342 or (703) 562-
2200.
FOR FURTHER INFORMATION CONTACT:
    OCC: Mark Ginsberg, Senior Risk Expert, or Benjamin Pegg, Risk
Expert, Capital and Regulatory Policy, (202) 649-6370; or Carl
Kaminski, Special Counsel, or Rima Kundnani, Attorney, Chief Counsel's
Office, (202) 649-5490, for persons who are deaf or hearing impaired,
TTY, (202) 649-5597, Office of the Comptroller of the Currency, 400 7th
Street SW, Washington, DC 20219.
    Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Elizabeth MacDonald, Manager, (202) 475-6216; Andrew Willis, Lead
Financial Institutions Policy Analyst, (202) 912-4323; Matthew
McQueeney, Senior Financial Institutions Policy Analyst (202) 452-2942;
or Benjamin McDonough, Assistant General Counsel (202) 452-2036; David
Alexander, Counsel, (202) 452-2877, Legal Division, Board of Governors
of the Federal Reserve System, 20th and C Streets NW, Washington, DC
20551. For the hearing impaired only, Telecommunication Device for the
Deaf (TDD), (202) 263-4869.
    FDIC: Benedetto Bosco, Chief, Capital Policy Section;
[email protected]; David Riley, Senior Policy Analyst, Capital Policy
Section; [email protected]; Michael Maloney, Senior Policy Analyst,
[email protected]; [email protected]; Capital Markets Branch,
Division of Risk Management Supervision, (202) 898-6888; Beverlea S.
Gardner, Senior Examination Specialist, [email protected], Policy and
Program Development; Michael Phillips, Counsel, [email protected]; or
Catherine Wood, Acting Supervisory Counsel, [email protected];
Supervision and Legislation Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Summary of Proposal
III. Regulatory Analyses
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act Analysis
    C. Plain Language
    D. OCC Unfunded Mandates Reform Act of 1995 Determination
    E. Riegle Community Development and Regulatory Improvement Act
of 1994
I. Background
    On September 28, 2018, the Office of the Comptroller of the
Currency (OCC), the Board of Governors of the Federal Reserve System
(Board), and the Federal Deposit Insurance Corporation (FDIC)
(collectively, the agencies) published a notice of proposed rulemaking
in the Federal Register (HVCRE NPR) to revise the high volatility
commercial real estate (HVCRE) exposure definition in section 2 of the
capital rule \1\ to conform to the statutory definition of ``high
volatility commercial real estate acquisition, development, or
construction (HVCRE ADC) loan'' in accordance with section 214 of the
Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA).\2\
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    \1\ The Board and OCC issued a joint final rule on October 11,
2013 (78 FR 62018), and the FDIC issued a substantially identical
interim final rule on September 10, 2013 (78 FR 55340). On April 14,
2014 (79 FR 20754), the FDIC adopted the interim final rule as a
final rule with no substantive changes.
    \2\ See 12 CFR 217.2 (Board); 12 CFR 3.2 (OCC); 12 CFR 324.2
(FDIC). Section 214 of the EGRRCPA generally defines an HVCRE ADC
Loan as a credit facility secured by land or improved real property
that, primarily finances, has financed, or refinances the
acquisition, development, or construction of real property; has the
purpose of providing financing to acquire, develop, or improve such
real property into income-producing real property; and is dependent
upon future income or sales proceeds from, or refinancing of, such
real property for the repayment of such credit facility.
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    Consistent with section 214, the agencies proposed in the HVCRE NPR
to exclude credit facilities that finance the acquisition, development,
or construction of one- to four-family residential properties from the
definition of HVCRE exposure. In the HVCRE NPR, the agencies also
invited comment on whether it would be appropriate to include one-to
four-family ``lot development loans'' within the scope of the one- to
four-family residential properties exclusion from the definition of
HVCRE exposure. Some commenters to the HVCRE NPR supported aligning the
one- to four-family residential properties exclusion with the treatment
of one- to four-family residential construction loans as reported in
the Call Report and FR Y-9C. Other commenters to the HVCRE NPR
supported the exclusion of lot development loans from the definition of
HVCRE exposure.
    After reviewing the comments related to lot development loans, the
agencies believe that the regulatory capital treatment of such loans
warrants further consideration and clarification before finalizing the
definition of an HVCRE exposure. The term ``lot development loan'' is
not defined in the capital rule. The agencies have considered the use
of the term ``lot development loan'' or ``land development loan'' for
purposes of the one-to-four-family residential properties exclusion to
the definition of HVCRE exposure, and are proposing to use the term
``land development,'' which is described in the instructions to the
Call Report and FR Y-9C as a loan that finances the process of
improving land, such as laying sewers, water pipes, and similar
improvements to prepare the land for erecting new structures.
Accordingly, the agencies are issuing this notice of proposed
rulemaking (proposal), which expands upon the HVCRE NPR, to seek
comment on the treatment of land development loans for the purpose of
the one- to four-family residential properties exclusion from the
definition of HVCRE exposure.
    Section 214 became effective upon enactment of the EGRRCPA.
Accordingly, on July 6, 2018, the agencies issued a statement
(interagency statement), advising banking organizations that, when
determining which loans should be subject to a heightened risk weight,
they may choose to continue to apply the current regulatory definition
of HVCRE exposure, or they may choose to apply
[[Page 35346]]
the heightened risk weight only to those loans they reasonably believe
meet the definition of ``HVCRE ADC loan'' set forth in section 214 of
the EGRRCPA.\3\ Until the agencies take further action, banking
organizations are advised to reference the interagency statement for
purposes of the HVCRE exposure definition and regulatory reporting.
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    \3\ Board, FDIC, and OCC, Interagency statement regarding the
impact of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180706a1.pdf. (last visited August 21,
2018).
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II. Summary of Proposal
    The agencies are expanding the HVCRE NPR to revise the definition
of HVCRE exposure in the capital rule by adding a new paragraph that
provides that the exclusion for one- to four-family residential
properties would not include credit facilities that solely finance land
development activities, such as the laying of sewers, water pipes, and
similar improvements to land, without any construction of one- to four-
family residential structures. In order for a loan to be eligible for
this exclusion, the credit facility would be required to include
financing for construction of one- to four-family residential
structures.
    Credit facilities that combine the financing of land development
and the construction of one- to four-family residential structures
would qualify for the one- to four-family residential properties
exclusion. This revision would generally align with the instructions
set forth in the Call Report and FR Y-9C on line 1.a.(1) of Schedules
RC-C and HC-C. Further, combination land acquisition and construction
loans on one- to four-family residential properties, regardless of the
current stage of construction or development, would qualify for the
one- to four-family residential properties exclusion as these exposures
are reported in the Call Report and FR Y-9C on line 1.a.(1) of
Schedules RC-C and HC-C. The agencies believe such combination loans
generally pose less risk than loans that solely finance land
development. Consistent with the HVCRE NPR, the proposal would maintain
that ``other land loans'' (generally loans secured by vacant land,
except for land known to be used for agricultural purposes) would
continue to be included within the scope of the revised HVCRE exposure
definition. Furthermore, under the proposal, combination land
acquisition loans and land development loans that do not include
financing for construction of one- to four-family residential
structures, would not qualify for the one- to four-family residential
properties exclusion. Under the proposal, a facility that solely
finances land development would be categorized as an HVCRE exposure,
unless the exposure meets another exclusion from the revised HVCRE
exposure definition.
    Allowing banking organizations to apply a consistent definition of
one- to four-family residential property and land development in this
manner would simplify reporting requirements, reduce burden, and
promote uniform application of the capital rule. Additionally,
supervisory experience has demonstrated that certain acquisition,
development, and construction loan exposures present risks for which
the agencies believe banking organizations should hold additional
capital. Supervisors generally consider land development loans to
present elevated risk as compared to construction loans. For example,
while the loan-to-value ratio is only one of several pertinent credit
factors to be considered when underwriting a real estate loan, the
agencies have established in their real estate lending standards more
stringent supervisory loan-to-value ratios for land development loans
(75 percent) than for construction loans (80 or 85 percent depending on
property type) because of the elevated credit risk in land development
loans.\4\ Furthermore, in some cases, land development loans may be
made for speculative purposes, generate no cash flow, and require other
sources of cash to service the debt. Based on the risks arising from
land development loans, the agencies believe it would be imprudent to
include loans that solely finance land development to prepare it for
erecting new structures as part of the one- to four-family residential
properties exclusion from the HVCRE exposure definition.
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    \4\ See Board, OCC, and FDIC, Interagency Guidelines For Real
Estate Lending Policies (real estate lending standards), 12 CFR part
208 Appendix C (Board); 12 CFR part 34 Appendix A (OCC); 12 CFR part
365 Appendix A (FDIC).
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    Consistent with the HVCRE NPR, the definition of HVCRE exposure
would provide that the determination of whether a land development loan
is considered an HVCRE exposure would be made at a loan's origination.
Therefore, with respect to land development loans originated prior to
the effective date of this rulemaking, the agencies would not expect
banking organizations to reevaluate those exposures against the revised
definition of HVCRE exposure. However, new land development loans
originated after the effective date of this rulemaking would need to be
evaluated in accordance with the revised HVCRE exposure definition for
the purpose of the one- to four-family residential properties
exclusion.
    Question 1: The agencies invite comment on the exclusion of credit
facilities that finance land development without any construction of
one- to four-family residential structures from the one- to four-family
residential properties exclusion in the HVCRE exposure definition. What
are the advantages and disadvantages of not permitting such land
development loans to qualify for the one- to four-family residential
properties exclusion in the revised HVCRE exposure definition? The
agencies welcome any quantitative analysis that could estimate the
approximate economic impact of including or excluding such land
development loans from the one- to four-family residential properties
exclusion.
    Question 2: The agencies invite comment on the proposed change to
the rule text of the HVCRE exposure definition including whether it is
sufficiently clear. What interpretation issues might arise from the
proposed change to the HVCRE exposure definition? What additional
clarity is needed to facilitate the consistent application of this
proposed change to the rule text of the HVCRE exposure definition in
the context of land development?
III. Regulatory Analyses
A. Paperwork Reduction Act
    Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and the 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 OMB control number for the OCC is
1557-0318, Board is 7100-0313, and FDIC is 3064-0153. These information
collections relate to the regulatory capital rules for each agency.
However, the agencies expect that these information collections will
not be affected by this proposed rule and therefore no submissions will
be made under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and
section 1320.11 of the OMB's implementing regulations (5 CFR 1320) for
each of the agencies' regulatory capital rules.
[[Page 35347]]
    The proposed rule also requires changes to the Call Reports (FFIEC
031, FFIEC 041, and FFIEC 051; OMB Nos. 1557-0081 (OCC), 7100-0036
(Board), and 3064-0052 (FDIC)) and Risk-Based Capital Reporting for
Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC
101; OMB Nos. 1557-0239 (OCC), 7100-0319 (Board), and 3064-0159
(FDIC)), and Consolidated Financial Statements for Holding Companies
(FR Y-9C; OMB No. 7100-0128), which will be addressed in separate
Federal Register notices.
B. Regulatory Flexibility Act Analysis
    OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA),
requires an agency, in connection with a proposed rule, to prepare an
Initial Regulatory Flexibility Analysis describing the impact of the
rule on small entities (defined by the SBA for purposes of the RFA to
include commercial banks and savings institutions with total assets of
$550 million or less and trust companies with total assets of $38.5
million of less) or to certify that the proposed rule would not have a
significant economic impact on a substantial number of small entities.
    As of June 30, 2018, the OCC supervises 886 small entities.\5\
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    \5\ The OCC calculated the number of small entities using the
SBA's size thresholds for commercial banks and savings institutions,
and trust companies, which are $550 million and $38.5 million,
respectively. Consistent with the General Principles of Affiliation,
13 CFR 121.103(a), the OCC counted the assets of affiliated
financial institutions when determining whether to classify a
national bank or Federal savings association as a small entity.
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    The proposed rule applies to all OCC-supervised depository
institutions. Currently, 211 small OCC-supervised institutions report
HVCRE exposures. Therefore, the rule will affect a substantial number
of small entities. However, the OCC does not find that the impact of
this proposed rule will be economically significant.
    Therefore, the OCC certifies that the proposed rule will not have a
significant economic impact on a substantial number of OCC-supervised
small entities.
    The proposed rule impacts two principal areas: (1) The capital
impact associated with implementing revisions to the one- to four-
family residential properties exclusion in the revised HVCRE exposure
definition and, (2) the impact associated with the time required to
update policies and procedures. As described in the Supplementary
Information section in the preamble to this proposed rule, the OCC
believes the change to the treatment of land development loans for the
purpose of the one- to four-family residential properties exclusion in
the definition of HVCRE exposure will result in an increase in future
required capital, once existing HVCRE land development loans roll over.
This is because the proposed rule does not require re-evaluation of
existing land development loans and would only apply to newly issued
land development loans after the effective date of this rulemaking.
This will serve to minimize the compliance burden for OCC-supervised
entities. The OCC finds that the amount of total capital that small
OCC-supervised institutions would need in the future in order to
maintain their total risk-based capital ratios, as of March 31, 2018,
would increase by approximately $33.97 million.
    In addition to facing increased capital requirements, OCC-
supervised banks may face one-time compliance costs associated with
updating policies and procedures to identify whether a newly issued
land development loan is eligible for the one- to four-family
residential properties exclusion in the revised HVCRE exposure
definition. Based on the OCC's supervisory experience, OCC staff
estimates that it would take an OCC-supervised institution, on average,
a one-time investment of one business day, or 8 hours, to update
policies and procedures to identify whether a newly issued land
development loan is eligible for the one- to four-family residential
properties exclusion in the revised HVCRE exposure definition.
    The OCC's threshold for a significant effect is whether cost
increases associated with a rule are greater than or equal to either 5
percent of a small bank's total annual salaries and benefits or 2.5
percent of a small bank's total non-interest expense. OCC-supervised
institutions would incur an estimated one-time compliance cost of $912
per institution (8 hours x $114 per hour).\6\ OCC staff finds that the
overall impact, which includes the future increase in required capital
and the cost of complying with the proposed rule, will not exceed
either of the thresholds for a significant impact on any OCC-supervised
small entities.
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    \6\ Under the assumption that banks would need twice the amount
of time to update policies and procedures, the estimated compliance
cost is $1,824 per institution (16 hours x $114 per hour).
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    For this reason, the OCC certifies that the proposed rule will not
have a significant economic impact on a substantial number of OCC-
supervised small entities.
    Board: The RFA requires an agency to either provide an initial
regulatory flexibility analysis with a proposal or certify that the
proposal will not have a significant impact on a substantial number of
small entities. Under regulations issued by the SBA, a small entity
includes a bank, bank holding company, or savings and loan holding
company with assets of $550 million or less (small banking
organization).\7\ On average during 2018, there were approximately
3,191 small bank holding companies, 204 small savings and loan holding
companies, and 549 small state member banks.
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    \7\ See 13 CFR 121.201. Effective July 14, 2014, the SBA revised
the size standards for banking organizations to $550 million in
assets from $500 million in assets. 79 FR 33647 (June 12, 2014).
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    The Board has considered the potential impact of the proposed rule
on small entities in accordance with the RFA. Based on the Board's
analysis, and for the reasons stated below, the Board believes that
this proposed rule will not have a significant economic impact on a
substantial number of small entities. Nevertheless, the Board is
providing an initial regulatory flexibility analysis with respect to
this proposed rule. A final regulatory flexibility analysis will be
conducted after comments received during the public comment period have
been considered. The Board welcomes comment on all aspects of its
analysis. In particular, the Board requests that commenters describe
the nature of any impact on small entities and provide empirical data
to illustrate and support the extent of the impact.
    As discussed in this SUPPLEMENTARY INFORMATION, the Board has
proposed to revise the definition of HVCRE exposure to conform to the
statutory definition of ``high volatility commercial real estate
acquisition, development, or construction (HVCRE ADC) loan,'' in
accordance with section 214 of EGRRCPA. The proposal would clarify that
certain land development loans as defined in the Call Report and FR Y-
9C instructions are included in the revised definition of HVCRE
exposure.
    The proposal would apply to all state member banks, as well as all
bank holding companies and savings and loan holding companies that are
subject to the Board's capital rule. Certain bank holding companies,
and savings and loan holding companies are excluded from the
application of the Board's capital rule. In general, the Board's
capital rule only applies to bank holding companies and savings and
loan holding companies that are not subject to the Board's Small Bank
Holding Company and Savings and Loan Holding Company Policy Statement,
which applies to bank holding
[[Page 35348]]
companies and savings and loan holding companies with less than $3
billion in total assets that also meet certain additional criteria.\8\
Thus, most bank holding companies and savings and loan holding
companies that would be subject to the proposed rule exceed the $550
million asset threshold at which a banking organization would qualify
as a small banking organization.
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    \8\ See 12 CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225,
appendix C; 12 CFR 238.9.
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    In assessing whether the proposal rule would have a significant
impact on a substantial number of small entities, the Board has
considered the proposal's capital impact as well as its compliance,
administrative, and other costs. As of December 31, 2018, there were
157 small state member banks and three small bank or savings and loan
holding companies that reported combined HVCRE exposures totaling $611
million and 1-4 family residential construction loans totaling $1.2
billion. To estimate the capital impact of the proposal, the Board
assumed a range of 75 to 95 percent of 1-4 family residential
construction loans would remain exempt from the revised definition of
HVCRE exposure. Based on this assumption, the difference in required
capital would be in the range of $7 million to $36 million for small
banking organizations supervised by the Board.
    In addition to capital impact, the Board has considered whether the
compliance, administrative, and other costs associated with the
proposed rule. Given that the proposed rule does not impact the
recordkeeping and reporting requirements that affected small banking
organizations are currently subject to, there would be no change to the
information that small banking organizations must track and report.
Some small banking organizations may incur costs associated with
updating internal policies to reflect the revised definition of HVCRE
exposure, including the treatment of land development loans. However,
because the proposal would clarify the treatment of HVCRE exposure and
land development loans that may currently be in effect at many small
banking organizations, the Board does not anticipate that a substantial
number of small banking organizations will incur significant costs to
update internal systems or policies to reflect the revised HVCRE
exposure definition.
    The Board does not believe that the proposed rule duplicates,
overlaps, or conflicts with any other Federal rules. In addition, there
are no significant alternatives to the proposed rule. In light of the
foregoing, the Board does not believe that the proposed rule, if
adopted in final form, would have a significant economic impact on a
substantial number of small entities.
    FDIC: The RFA generally requires that, in connection with a
proposed rulemaking, an agency prepare and make available for public
comment an initial regulatory flexibility analysis describing the
impact of the proposed rule on small entities.\9\ However, a regulatory
flexibility analysis is not required if the agency certifies that the
proposed rule will not have a significant economic impact on a
substantial number of small entities. The SBA has defined ``small
entities'' to include banking organizations with total assets of less
than or equal to $550 million that are independently owned and operated
or owned by a holding company with less than or equal to $550 million
in total assets.\10\ 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 non-
interest expenses. The FDIC believes that effects in excess of these
thresholds typically represent significant effects for FDIC-supervised
institutions. For the reasons described below and under section 605(b)
of the RFA, the FDIC certifies that this proposed rule will not have a
significant economic impact on a substantial number of small entities.
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    \9\ 5 U.S.C. 601 et seq.
    \10\ The SBA defines a small commercial bank to have $550
million or less in total assets. See 13 CFR 121.201 (as amended,
effective December 2, 2014). The SBA requires agencies to ``consider
assets of affiliated and acquired financial institutions reported in
the previous four quarters.'' See 13 CFR 121.104. Therefore, the
FDIC utilizes merger-adjusted and affiliated assets, averaged over
the previous four quarters, to identify whether a bank is a ``small
entity'' for the purposes of RFA.
---------------------------------------------------------------------------
    The FDIC supervises 3,489 depository institutions,\11\ of which
2,674 are considered small entities for the purposes of RFA.\12\
According to recent data, 2,145 small, FDIC-supervised institutions
report holding some volume of ADC loans for one- to four-family
residential properties. Therefore, the FDIC estimates that the proposed
rule is likely to affect a substantial number, 2,145 (80.2 percent), of
small, FDIC-supervised institutions.\13\
---------------------------------------------------------------------------
    \11\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
    \12\ FDIC Call Report, December 31st, 2018.
    \13\ Id.
---------------------------------------------------------------------------
    This proposed rule would require institutions to treat some future
land development loans for one- to four-family residential properties
as HVCRE, which means they would receive a risk weight of 150 percent
rather than 100 percent, unless such loans would qualify for a
different exclusion. Based on comments received by the agencies, there
is some uncertainty about the treatment for certain land development
loans under the proposed definition of HVCRE. This proposed rule
clarifies the treatment for certain land development loans and is
likely to result in increased risk-weighted assets, and therefore
increased risk-based capital requirements, for affected institutions.
The effects of the proposed rule will be realized over the ensuing
years by affected institutions as they make more land development
loans. The Call Report does not collect data on land development loans
in a standalone line item. However, such loans would be included in the
category of one- to four-family residential construction loans on
Schedule RC-C Line 1.a(1) if they include financing for the
construction of one- to four-family residential structures. Residential
mortgage exposures receive a 50 percent risk weight if they are secured
by prudently-underwritten first liens on one- to four-family
residential properties, while other residential mortgage exposures
receive a 100 percent risk weight.\14\ Therefore, the 100 percent risk
weight category of residential mortgage exposures includes land
development loans, other construction loans, as well as credit lines
secured by home equity and mortgage loans secured by junior liens on
one- to four-family residential properties. The potential effects of
the proposed increase in risk-weight treatment for certain land
development loans is difficult to quantify as it depends on the future
volume of such lending. Assuming that current loan volume is an
accurate proxy for future lending activity, to determine the maximum
potential capital effect of the proposed rule, the FDIC assumes that
all construction loans currently reported by FDIC-supervised
institutions that are secured by one- to four-family residential
properties are land development loans. The FDIC also assumes that the
ratio of currently reported residential construction loans to currently
reported total residential mortgage loans (other than those secured by
first liens of one- to four-family residential properties) is the same
for each institution's 100 percent risk-weight category of residential
mortgage exposures as it is for each institution's loan portfolio, and
that covered institutions would maintain the same risk-based capital
ratio after the proposed rule goes into effect. Using those
assumptions, the FDIC finds that the amount of total capital that small
[[Page 35349]]
FDIC-supervised institutions would need in the future in order to
maintain their current total risk-based capital ratios would increase
by $259.20 million (0.50 percent); the amount of tier 1 capital
institutions would need in order to maintain their current tier 1 risk-
based capital ratios would increase by $242.8 million (0.50 percent);
and the amount of common equity tier 1 capital institutions would need
in order to maintain their current common equity tier 1 risk-based
capital ratios would increase by $242.5 million (0.50 percent). The
maximum estimated potential future capital increase of $259.20 million
for small, FDIC-supervised institutions consistent with maintaining
their current risk-based capital ratios, amounts to an average increase
in capital of $120,839 per affected institution.\15\
---------------------------------------------------------------------------
    \14\ 78 FR 55340.
    \15\ FDIC Call Report, December 31st, 2018.
---------------------------------------------------------------------------
    The change in required capital precipitated by the proposed rule
will almost certainly be less than the maximum estimated amount, since
not all current credit facilities that finance land development without
any construction of one- to four-family residential properties would
qualify for a higher risk weight. The estimated maximum increase in
capital would represent less than five percent of total current risk-
based capital for all but 30 small FDIC-supervised institutions, and
less than ten percent of risk-based capital for all but 11 FDIC-
supervised institutions.\16\ Since land development loans are not
reported separately on the Call Report, they could comprise anywhere
from zero to 100 percent of residential construction loans for each
institution.
---------------------------------------------------------------------------
    \16\ Id.
---------------------------------------------------------------------------
    The proposed rule could pose some administrative costs for covered
institutions associated with reviewing land development loan
portfolios. It is difficult to accurately estimate the costs that each
institution will incur in order to conduct reviews since it depends on
each institution's volume of land development loans. However, assuming
that each institution requires 40 hours of labor to adopt new policies
and procedures for reviewing new lot development loans, and assuming an
hourly cost of $83.23,\17\ the estimated administrative costs resulting
from this proposal would be $3,329.20 per institution or $7,141,134 for
all small, FDIC-supervised institutions. These administrative costs
amount to less than two percent of annualized salary expense, and less
than one percent of annualized noninterest expense, for all small,
FDIC-supervised institutions directly affected by the proposed
rule.\18\ Therefore, this aspect of the proposed rule does not have a
significant effect on small, FDIC-supervised institutions directly
affected by the proposed rule.
---------------------------------------------------------------------------
    \17\ Estimated total hourly compensation of Financial Analysts
in the Depository Credit Intermediation sector as of December 2018.
The estimate includes the May 2017 75th percentile hourly wage rate
reported by the Bureau of Labor Statistics, National Industry-
Specific Occupational Employment, and Wage Estimates. This wage rate
has been adjusted for changes in the Consumer Price Index for all
Urban Consumers between May 2017 and December 2018 (3.59 percent)
and grossed up by 50.83 percent to account for non-monetary
compensation as reported by the December 2018 Employer Costs for
Employee Compensation Data.
    \18\ FDIC Call Report, December 31st, 2018.
---------------------------------------------------------------------------
    This proposed rule would likely increase capital requirements for
some land development loans, which could potentially decrease the
volume of this type of lending by small, FDIC-supervised institutions.
The FDIC believes that this effect will likely be small given that the
amendments only affect a subset of residential construction loans,
which represent a small portion of total assets for most small, FDIC-
supervised institutions. Going forward, institutions also could have an
incentive to shift their loan mix away from credit facilities that
finance land development without any construction of one- to four-
family residential properties. Increases in required capital could
enhance the ability of small, FDIC-supervised institutions to withstand
an economically stressful scenario. This effect would only be relevant
for a small number of institutions with material exposures to the types
of loans covered by the proposed rule.
    The baseline for analysis of the expected effects of the proposed
rule on small entities is the current regulatory definition of HVCRE
and the interagency statement.\19\ However, as described previously,
this NPR expands upon the HVCRE NPR. The HVCRE NPR revises the
definition of HVCRE exposure in the regulatory capital rule to conform
to the statutory definition of ``high volatility commercial real estate
acquisition, development, or construction (HVCRE ADC) loan,'' in
accordance with section 214 of the Economic Growth, Regulatory Relief,
and Consumer Protection Act (EGRRCPA). If the total expected effects of
the proposed rule and the HVCRE NPR were considered together they are
likely to result in a reduction in risk weighted assets for affected
institutions.
---------------------------------------------------------------------------
    \19\ Board, FDIC, and OCC, Interagency statement regarding the
impact of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180706a1.pdf. (last visited August 21,
2018).
---------------------------------------------------------------------------
    Based on this supporting information, the FDIC does not believe
that the proposed rule will have a significant economic impact on 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. Plain Language
    Section 722 of the Gramm-Leach-Bliley Act \20\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the proposed rule in a simple and straightforward manner, and invite
comment on the use of plain language. For example:
---------------------------------------------------------------------------
    \20\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
---------------------------------------------------------------------------
     Have the agencies organized the material to suit your
needs? If not, how could they present the proposed rule more clearly?
     Are the requirements in the proposed rule clearly stated?
If not, how could the proposed rule be more clearly stated?
     Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would achieve that?
     Would more, but shorter, sections be better? If so, which
sections should be changed?''
     What other changes can the agencies incorporate to make
the regulation easier to understand?
D. OCC Unfunded Mandates Reform Act of 1995 Determination
    The OCC analyzed the proposed rule under the factors set forth in
the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under
this analysis, the OCC considered whether the rule includes a Federal
mandate that may result in the expenditure by State, local, and Tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted for inflation). The OCC has
determined that this rule will not result in expenditures by State,
local, and Tribal governments, or the private
[[Page 35350]]
sector, of $100 million or more in any one year. Accordingly, the OCC
has not prepared a written statement to accompany this proposed rule.
E. Riegle Community Development and Regulatory Improvement Act of 1994
    Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\21\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions, 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.\22\
---------------------------------------------------------------------------
    \21\ 12 U.S.C. 4802(a).
    \22\ Id.
---------------------------------------------------------------------------
    The agencies note that comment on these matters has been solicited
in other sections of this Supplementary Information section, and that
the requirements of RCDRIA will be considered as part of the overall
rulemaking process. In addition, the agencies also invite any other
comments that further will inform the agencies' consideration of
RCDRIA.
List of Subjects
12 CFR Part 3
    Administrative practice and procedure, Banks, Banking, Capital
adequacy, Capital requirements, Asset Risk-weighting methodologies,
Reporting and recordkeeping requirements, National banks, Federal
savings associations, Risk.
12 CFR Part 217
    Administrative practice and procedure, Banks, Banking, Capital
adequacy, Capital requirements, Asset Risk-weighting methodologies,
Reporting and recordkeeping requirements, Holding companies, State
member banks, Risk.
12 CFR Part 324
    Administrative practice and procedure, Banks, Banking, Capital
adequacy, Capital requirements, Asset Risk-weighting methodologies,
Reporting and recordkeeping requirements, State savings associations,
State non-member banks, Risk.
Office of the Comptroller of the Currency
    For the reasons set out in the SUPPLEMENTARY INFORMATION, the OCC
proposes to amend 12 CFR part 3 as follows.
PART 3--CAPITAL ADEQUACY STANDARDS
0
1. The authority citation for Part 3 continues to read as follows:
    Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
0
2. Amend Sec.  3.2 by revising the definition of a ``high volatility
commercial real estate (HVCRE) exposure'' to read as follows:
Sec.  3.2   Definitions.
* * * * *
    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 depository 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) Does not include a credit facility financing--
    (i) The acquisition, development, or construction of properties
that are--
    (A) One- to four-family residential properties;
    (B) Real property that would qualify as an investment in community
development; or
    (C) Agricultural land;
    (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
national bank's or Federal savings association'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
national bank's or Federal savings association'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
maximum supervisory loan-to-value ratio as determined by the OCC;
    (B) The borrower has contributed capital of at least 15 percent of
the real property's appraised, `as completed' value to the project 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 minimum amount of capital
described under paragraph (2)(iv)(B) of this definition before the
national bank or Federal savings association advances funds (other than
the advance of a nominal sum made in order to secure the national
bank's or Federal savings association'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 national
bank or Federal savings association as a non-HVCRE exposure under
paragraph (6) of this definition;
    (3) Does not include any loan made prior to January 1, 2015; and
    (4) 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 shall be the appraised value of
the property as determined under standards prescribed pursuant to
section 1110 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (12 U.S.C. 3339), 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
[[Page 35351]]
exposure definition and with respect to a credit facility and a
national bank or Federal savings association, a national bank or
Federal savings association 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 national bank's or Federal savings
association's applicable loan underwriting criteria for permanent
financings.
    (7) For purposes of this definition, 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 in paragraph
2(i)(A).
* * * * *
Board of Governors of the Federal Reserve System
    For the reasons set out in the Supplementary Information, part 217
of chapter II of title 12 of the Code of Federal Regulations is
proposed to be amended as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q).
0
3. The authority citation for part 217 continues to read as follows:
    Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
0
4. Section 217.2 is amended by revising the definition of a ``high
volatility commercial real estate (HVCRE) exposure'' to read as
follows:
Sec.  217.2  Definitions.
* * * * *
    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 Board-regulated 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; provided that:
    (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;
    (B) Real property that would qualify as an investment in community
development; or
    (C) Agricultural land;
    (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
Board-regulated 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
Board-regulated 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
maximum supervisory loan-to-value ratio as determined by the Board;
    (B) The borrower has contributed capital of at least 15 percent of
the real property's appraised, `as completed' value to the project 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 minimum amount of capital
described under paragraph (2)(iv)(B) of this definition before the
Board-regulated institution advances funds (other than the advance of a
nominal sum made in order to secure the Board-regulated 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 Board-regulated institution as a non-HVCRE exposure
under paragraph (6) of this definition;
    (3) An HVCRE exposure does not include any loan made prior to
January 1, 2015;
    (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
definition of HVCRE exposure, 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 pursuant
to section 1110 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (12 U.S.C. 3339), 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
definition of HVCRE exposure and with respect to a credit facility and
a Board-regulated institution, a Board-regulated 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 Board-regulated institution's
applicable loan underwriting criteria for permanent financings.
    (7) For purposes of this definition, 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 in paragraph
2(i)(A).
* * * * *
Federal Deposit Insurance Corporation
    For the reasons set out in the Supplementary Information, the FDIC
proposes to amend 12 CFR part 324 as follows.
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
Subpart A--General Provisions
0
5. The authority citation for part 324 continues to read as follows:
    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i),
[[Page 35352]]
1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L.
102-233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L.
102-242, 105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108
Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat.
2236, 2386, as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12
U.S.C. 1828 note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C.
78o-7 note).
0
6. Section 324.2 is amended by revising the definition of a ``high
volatility commercial real estate (HVCRE) exposure'' as follows:
Sec.  324.2  Definitions.
* * * * *
    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 FDIC-supervised 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; provided that:
    (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;
    (B) Real property that would qualify as an investment in community
development; or
    (C) Agricultural land;
    (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 FDIC-
supervised 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 FDIC-
supervised 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
maximum supervisory loan-to-value ratio as determined by the FDIC;
    (B) The borrower has contributed capital of at least 15 percent of
the real property's appraised, `as completed' value to the project 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 minimum amount of capital
described under paragraph (2)(iv)(B) of this definition before the
FDIC-supervised institution advances funds (other than the advance of a
nominal sum made in order to secure the FDIC-supervised 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 FDIC-supervised institution as a non-HVCRE exposure
under paragraph (6) of this definition;
    (3) An HVCRE exposure does not include any loan made prior to
January 1, 2015;
    (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
definition of HVCRE exposure, 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 pursuant
to section 1110 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (12 U.S.C. 3339), 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
definition of HVCRE exposure and with respect to a credit facility and
an FDIC-supervised institution, an FDIC-supervised 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 FDIC-supervised institution's
applicable loan underwriting criteria for permanent financings.
    (7) For purposes of this definition, 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 in paragraph
2(i)(A).
* * * * *
    Dated: June 10, 2019.
Joseph M. Otting,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve
System, July 11, 2019.
Michele Taylor Fennell,
Assistant Secretary of the Board.
Federal Deposit Insurance Corporation.
    By order of the Board of Directors.
    Dated at Washington, DC, on June 7, 2019.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019-15332 Filed 7-22-19; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P