Risk Weighting of High Volatility Commercial Real Estate (HVCRE) Exposures
| Published date | 26 August 2021 |
| Citation | 86 FR 47601 |
| Record Number | 2021-17560 |
| Section | Proposed rules |
| Court | Farm Credit Administration |
47601
Federal Register / Vol. 86, No. 163 / Thursday, August 26, 2021 / Proposed Rules
other sources of income, and its
anticipated expenses. Further, the
Committee considered several
alternative expenditure levels and
assessment rates, including not
changing the assessment rate or
adjusting expenses. Ultimately, the
Committee recommended the $0.20 per
hundredweight assessment rate to fund
the program’s expenses and maintain its
reserve at a reasonable level.
A review of historical and preliminary
information pertaining to the upcoming
crop year indicates that the producer
price for the 2020–21 crop year is
estimated to be $201.50 per
hundredweight of dates. Utilizing that
price, the estimated crop size, and the
proposed assessment rate of $0.20 per
hundredweight, the estimated
assessment revenue for the 2020–21
crop year as a percentage of total
producer revenue will be approximately
0.1 percent ($0.20 per hundredweight
divided by $201.50 per hundredweight).
This proposed action would increase
the assessment obligation imposed on
handlers. While assessments impose
some additional costs on handlers, the
costs are minimal and uniform on all
handlers. Some additional costs may be
passed on to producers. However, these
costs would be offset by the benefits
derived by the operation of the Order.
In addition, the Committee’s and the
Subcommittee’s meetings were widely
publicized throughout the California
date industry. All interested persons
were invited to attend the meetings and
encouraged to participate in Committee
deliberations on all issues. The June 25,
2020 Committee meeting was a virtually
held public meeting and all entities,
both large and small, were able to
express views on this issue. Interested
persons are invited to submit comments
on this proposed rule, including the
regulatory and information collection
impacts of this action on small
businesses.
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
Chapter 35), the Order’s information
collection requirements have been
previously approved by the Office of
Management and Budget (OMB) and
assigned OMB No. 0581–0178 Vegetable
and Specialty Crops. No changes in
these requirements would be necessary
as a result of this action. Should any
changes become necessary, they would
be submitted to OMB for approval.
This proposed rule would not impose
any additional reporting or
recordkeeping requirements on either
small or large California date handlers.
As with all Federal marketing order
programs, reports and forms are
periodically reviewed to reduce
information requirements and
duplication by industry and public
sector agencies.
AMS is committed to complying with
the E-Government Act, to promote the
use of the internet and other
information technologies to provide
increased opportunities for citizen
access to Government information and
services, and for other purposes.
USDA has not identified any relevant
Federal rules that duplicate, overlap, or
conflict with this proposed rule.
A small business guide on complying
with fruit, vegetable, and specialty crop
marketing agreements and orders may
be viewed at: http://www.ams.usda.gov/
rules-regulations/moa/small-businesses.
Any questions about the compliance
guide should be sent to Richard Lower
at the previously mentioned address in
the
FOR FURTHER INFORMATION CONTACT
section.
List of Subjects in 7 CFR Part 987
Dates, Marketing agreements,
Reporting and recordkeeping
requirements.
For reasons set forth in the preamble,
7 CFR part 987 is proposed to be
amended as follows:
PART 987—DOMESTIC DATES
PRODUCED OR PACKED IN
RIVERSIDE COUNTY, CALIFORNIA
■1. The authority citation for part 987
continues to read as follows:
Authority: 7 U.S.C. 601–674.
■2. Section 987.339 is revised to read
as follows:
§ 987.339 Assessment rate.
On and after October 1, 2020, an
assessment rate of $0.20 per
hundredweight is established for dates
produced or packed in Riverside
County, California.
Erin Morris,
Associate Administrator, Agricultural
Marketing Service.
[FR Doc. 2021–17912 Filed 8–25–21; 8:45 am]
BILLING CODE 3410–02–P
FARM CREDIT ADMINISTRATION
12 CFR Part 628
RIN 3052–AD42
Risk Weighting of High Volatility
Commercial Real Estate (HVCRE)
Exposures
AGENCY
: Farm Credit Administration.
ACTION
: Proposed rule.
SUMMARY
: The Farm Credit
Administration (FCA, we, or our) is
seeking comments on this proposed rule
that would revise our regulatory capital
requirements for Farm Credit System
(FCS or System) institutions to define
and establish risk-weightings for High
Volatility Commercial Real Estate
(HVCRE) exposures.
DATES
: Please send us your comments
on or before November 24, 2021.
ADDRESSES
: For accuracy and efficiency
reasons, please submit comments by
email or through FCA’s website. We do
not accept comments submitted by
facsimiles (fax), as faxes are difficult for
us to process and achieve compliance
with section 508 of the Rehabilitation
Act of 1973. Please do not submit your
comment multiple times via different
methods. You may submit comments by
any of the following methods:
•Email: Send us an email at reg-
comm@fca.gov.
•FCA Website: http://www.fca.gov.
Click inside the ‘‘I want to. . .’’ field
near the top of the page; select
‘‘comment on a pending regulation’’
from the dropdown menu; and click
‘‘Go.’’ This takes you to an electronic
public comment form.
•Mail: Kevin J. Kramp, Director,
Office of Regulatory Policy, Farm Credit
Administration, 1501 Farm Credit Drive,
McLean, VA 22102–5090.
You may review copies of comments
we receive on our website at http://
www.fca.gov. Once you are on the
website, click inside the ‘‘I want to. . .’’
field near the top of the page; select
‘‘find comments on a pending
regulation’’ from the dropdown menu;
and click ‘‘Go.’’ This will take you to the
Comment Letters page where you can
select the regulation for which you
would like to read the public comments.
We will show your comments as
submitted, including any supporting
data provided, but for technical reasons
we may omit items such as logos and
special characters. Identifying
information that you provide, such as
phone numbers and addresses, will be
publicly available. However, we will
attempt to remove email addresses to
help reduce internet spam. You may
also review comments at our office in
McLean, Virginia. Please call us at (703)
883–4056 or email us at reg-comm@
fca.gov to make an appointment.
FOR FURTHER INFORMATION CONTACT
:
Technical information: Ryan Leist,
LeistR@fca.gov, Senior Accountant, or
Jeremy R. Edelstein, EdelsteinJ@fca.gov,
Associate Director, Finance and Capital
Markets Team, Office of Regulatory
Policy, Farm Credit Administration,
McLean, VA 22102–5090, (703) 883–
4414, TTY (703) 883–4056 or
ORPMailbox@fca.gov; or
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Federal Register / Vol. 86, No. 163 / Thursday, August 26, 2021 / Proposed Rules
1
The FBRAs are the Office of the Comptroller of
the Currency (OCC), the Board of Governors of the
Federal Reserve System (FRB), and the Federal
Deposit Insurance Corporation (FDIC).
2
78 FR 62018 (October 11, 2013) (final rule of the
OCC and the FRB); 79 FR 20754 (April 14, 2014)
(final rule of the FDIC).
3
Basel III was published in December 2010 and
revised in June 2011. The text is available at http://
www.bis.org/publ/bcbs189.htm. The BCBS was
established in 1974 by central banks with bank
supervisory authorities in major industrial
countries. The BCBS develops banking guidelines
and recommends them for adoption by member
countries and others. BCBS documents are available
at http://www.bis.org. The FCA does not have
representation on the Basel Committee as the
FBRAs do.
4
79 FR 52814.
5
See 79 FR 52814, 52820. FCA is not required by
law to follow the Basel Committee standards.
6
81 FR 49719, 49736 (July 28, 2016).
7
See supra footnote 6.
8
FCA staff submitted a comment letter in
response to one of the proposals that communicated
our concerns with a proposed exemption for
agricultural land.
9
Public Law 115–174, 132 Stat. 1296 (2018).
10
84 FR 68019.
Legal information: Jennifer Cohn,
CohnJ@fca.gov, Senior Counsel, Office
of General Counsel, Farm Credit
Administration, McLean, VA 22102–
5090, (720) 213–0440, TTY (703) 883–
4056.
SUPPLEMENTARY INFORMATION
:
Table of Contents
I. Introduction
A. Objectives of the Proposed Rule
B. Background
II. Proposed Rule
A. Scope of HVCRE Exposure Definition
B. Exclusions From HVCRE Exposure
Definition
1. One- to Four-Family Residential
Properties
2. Agricultural Land
3. Loans on Existing Income Producing
Properties That Qualify as Permanent
Financings
4. Certain Commercial Real Property
Projects
a. Loan-to-Value Limits
b. Contributed Capital
c. Value Appraisal
d. Project
5. Reclassification as a Non-HVCRE
Exposure
6. Applicability Only to Loans Made After
Effective Date
C. Impact on Prior FCA Board Actions
III. Regulatory Flexibility Act Analysis
I. Introduction
A. Objectives of the Proposed Rule
The FCA’s objectives in proposing
this rule are to:
•Update capital requirements to
reflect the increased risks that exposures
to certain acquisition, development or
construction loans pose to System
institutions; and
•Ensure that the System’s capital
requirements are comparable to the
Basel III framework and the
standardized approach the Federal
banking regulatory agencies have
adopted, with deviations as appropriate
to accommodate the different
operational and credit considerations of
the System.
B. Background
In October 2013 and April 2014, the
Federal banking regulatory agencies
(FBRAs)
1
published in the Federal
Register capital rules governing the
banking organizations they regulate.
2
Those rules follow the Basel Committee
on Banking Supervision’s (BCBS or
Basel Committee) document entitled
‘‘Basel III: A Global Regulatory
Framework for More Resilient Banks
and Banking Systems’’ (Basel III),
including subsequent changes to the
BCBS’s capital standards and BCBS
consultative papers.
3
On September 4, 2014, FCA published
in the Federal Register a notice of
proposed rulemaking seeking public
comment on revisions to our regulatory
capital requirements.
4
Our proposed
rule was comparable to the final rule of
the FBRAs and the Basel III framework,
while taking into account the
cooperative structure and the
organization of the System. Beginning in
2010, System institutions had sought for
FCA to adopt a capital framework that
was as similar as possible to the capital
guidelines of the FBRAs as revised to
implement the Basel III standards. In
particular, System institutions had
asserted that consistency of FCA capital
requirements with those of the FBRAs
would allow investors, shareholders,
and others to better understand the
financial strength and risk-bearing
capacity of the System.
5
Included in the provisions we
proposed to adopt was a 150 percent
risk-weight for HVCRE exposures. Our
proposed definition of HVCRE was very
similar to the definition the FBRAs had
adopted at the time. System commenters
expressed concern about parts of the
proposed HVCRE definition and asked
us not to adopt the definition. We did
not adopt the HVCRE provisions when
we adopted our final capital rules
because we wanted to further consider
and analyze HVCRE.
6
In the preamble to
the final capital rule, we said that we
expected to engage in additional HVCRE
rulemaking in the future.
7
Beginning in 2017, the FBRAs issued
several proposed rules on HVCRE
exposures, in an effort to address
concerns with the original definition.
8
On May 24, 2018, the Economic Growth,
Regulatory Relief, and Consumer
Protection Act (EGRRCPA)
9
was
enacted, adding a new statutory
definition that would have to be
satisfied for an exposure to be risk-
weighted as an HVCRE exposure. On
December 13, 2019, the FBRAs
published a final rule, which became
effective on April 1, 2020, implementing
the EGRRCPA requirements.
10
Many of the provisions in the FBRAs’
final rule address the concerns
commenters raised in response to the
FCA’s 2014 proposed rule. Accordingly,
to ensure that System institutions
continue to hold enough regulatory
capital to fulfill their mission as a
Government-sponsored enterprise, we
propose provisions that are, in general,
similar to the FBRA provisions.
However, we propose differences in two
general areas. First, in their rule the
FBRAs clarified the interpretation of
certain terms generally to be consistent
with their usage in other FBRA
regulations or Call Report instructions;
while we do not propose different
interpretations of these terms, we do not
propose to refer to these FBRA
references, as we do not believe that is
appropriate in our rules. Second, we
propose some differences where
appropriate to accommodate the
different operational and credit
considerations of the System, while
continuing to maintain appropriate
safety and soundness.
II. Proposed Rule
Because of the increased risk in
exposures that fall within the definition
of HVCRE exposures, we propose,
consistent with the FBRAs, to assign a
150 percent risk-weight to those
exposures, rather than the 100 percent
risk-weight generally assigned to
commercial real estate and other
corporate exposures under FCA
regulation § 628.32(f)(1). As discussed
below, our proposed rule is similar to
the FBRAs’ rule in most respects. In
general, the same loan to the same
borrower—whether it is made by a
commercial bank or a System
institution—carries the same risk and
should be assigned the same risk-
weight. The proposed definition of
HVCRE exposure is intended to capture
only those exposures that have
increased risk characteristics in the
acquisition, development, or
construction of real property.
As with the risk-weighting provisions
of our capital rules generally, language
in the proposed definition of HVCRE
exposure that refers to the financing of
certain types of property or projects
does not itself provide authority for an
institution to engage in that financing,
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11
As stated in the preamble to the Tier 1/Tier 2
Capital Framework final rule, ‘‘We remind System
institutions that the presence of a particular risk
weighting does not itself provide authority for a
System institution to have an exposure to that asset
or item.’’ See 81 FR 49719, 49722 (July 28, 2016).
12
There may be overlap between HVCRE
exposures and exposures to land in transition—
agricultural land in the path of development.
System institutions contemplating land in
transition financing must review and understand
FCA Bookletter BL–058 and must ensure they are
in full compliance with all FCA regulations.
13
FCA regulation §614.4240(q) defines ‘‘real
property’’ as ‘‘all interests, benefits, and rights
inherent in the ownership of real estate.’’
14
A determination that a loan is a ‘‘credit facility
secured by land or improved real property’’ does
not mean that the loan is necessarily an HVCRE
exposure. As mentioned above, a loan also has to
satisfy three criteria, and not be subject to an
exclusion, to be an HVCRE exposure.
15
See e.g., Farm Credit Council comment letter,
Regulatory Capital, Implementation of Tier1/Tier2
Framework, dated February 13, 2015.
or to have an exposure to that property
or project. This is a risk-weighting
regulation only.
11
System scope and
eligibility authorities are contained in
other provisions of our regulations and
in the Farm Credit Act of 1971, as
amended (Act).
12
A. Scope of HVCRE Exposure Definition
As the FBRAs did, we propose to
define an HVCRE exposure as ‘‘a credit
facility secured by land or improved
real property’’ that meets three criteria
(and that does not meet any of the
definition’s exclusions, which are
discussed below).
13
The FBRAs defined
this term in a manner that is consistent
with the definition of ‘‘a loan secured by
real estate’’ in their Call Report forms
and instructions. In that definition, a
loan is secured by real estate if the
estimated value of the real estate
collateral at origination (after deducting
all senior liens held by others) is greater
than 50 percent of the principal amount
of the loan at origination.
We propose to adopt the same
meaning of ‘‘a credit facility secured by
land or improved real property’’ as the
FBRAs have adopted. Therefore, for
example, if an institution makes a loan
to construct and equip a building, and
the loan is secured by both the real
estate and the equipment, the institution
must estimate the value of the building,
upon completion, and of the equipment.
If the value of the building is greater
than 50 percent of the principal amount
of the loan at origination, the loan
would be a ‘‘loan secured by real
estate,’’ and it would therefore be a
‘‘credit facility secured by land or
improved real property.’’
14
If the value
of the building, upon completion, is less
than 50 percent of the principal amount
of the loan at origination, it would not
be a ‘‘loan secured by real estate,’’ and
it would therefore not be a ‘‘credit
facility secured by land or improved
real property.’’ Accordingly, it would
not be an HVCRE exposure.
Under our proposal, a ‘‘credit facility
secured by land or improved real
property’’ would not be classified as an
HVCRE exposure unless it met the
following three criteria. If such a credit
facility did not meet all three criteria, it
would not be an HVCRE exposure. First,
the credit facility must primarily
finance or refinance the acquisition,
development, or construction of real
property. Second, the purpose of the
credit facility must be to provide
financing to acquire, develop, or
improve such real property into income-
producing property. Finally, the
repayment of the credit facility must
depend upon the future income or sales
proceeds from, or refinancing of, such
real property.
The first criterion is that the credit
facility must primarily finance or
refinance the acquisition, development,
or construction of real property. This
criterion is satisfied if more than 50
percent of the proposed use of the loan
funds is for the acquisition,
development, or construction of real
property. The criterion is not satisfied if
50 percent or less of the proposed use
of the loan funds is for the acquisition,
development, or construction of real
property.
The second criterion is that the credit
facility has the purpose of providing
financing to acquire, develop, or
improve the real property into income-
producing property.
The third criterion is that the credit
facility is dependent for repayment
upon future income or sales proceeds
from, or refinancing of, the real
property. This criterion narrows the
scope of the definition of HVCRE
exposure from the definition we
proposed in 2014. The definition we
proposed in 2014 would have included
within the scope of HVCRE exposures
credit facilities for which repayment
would be from the ongoing business of
the borrower, as well as credit facilities
that were dependent for repayment
upon future income or sales proceeds.
The Farm Credit Council and several
System banks and association
commenters expressed concern with the
breadth of this definition from the 2014
proposal.
15
This proposal addresses that
concern, since credit facilities that will
be repaid from the borrower’s ongoing
business would not be classified as an
HVCRE exposure. We believe that a
majority of System loans are repaid from
the borrower’s ongoing business rather
than from future income or sales
proceeds, and therefore that a majority
of potential System HVCRE exposures
would not meet this criterion and would
not be HVCRE exposures.
B. Exclusions From HVCRE Exposure
Definition
Under this proposal, the exposures
described in the following paragraphs
would be excluded from the definition
of HVCRE exposure:
1. One- to Four-Family Residential
Properties
Under this proposal, as in the FBRA
rule, an HVCRE exposure would not
include a credit facility financing the
acquisition, development, or
construction of properties that are one-
to four-family residential properties,
provided that the dwelling (including
attached components such as garages,
porches, and decks) represents at least
50 percent of the total appraised value
of the collateral secured by the first or
subsequent lien.
Manufactured homes permanently
affixed to the underlying property,
when deemed to be real property under
state law, would qualify for this
exclusion, as would construction loans
secured by single family dwelling units,
duplex units, and townhouses.
Condominium and cooperative
construction loans would qualify for
this exclusion, even if the loan is
financing the construction of a building
with five or more dwelling units, as long
as the repayment of the loan comes from
the sale of individual condominium
dwelling units or individual cooperative
housing units. This exclusion would
apply to all credit facilities that fall
within its scope, whether rural home
financing under § 613.3030 or one- to
four-family residential property
financing under § 613.3000(b). Similar
to the reduced risk-weight assigned to
residential mortgage exposures under
§ 628.32(g)(1), a credit facility would
qualify for this exclusion only if the
property securing the credit facility
exhibits characteristics of residential
property rather than agricultural
property including, but not limited to,
the requirement that the dwelling
(including attached components such as
garages, porches, and decks) represents
at least 50 percent of the total appraised
value of the collateral secured by the
first or subsequent lien. If examiners
determined that the property was not
residential in nature, the credit facility
would not qualify for this exclusion.
Loans for multifamily residential
property construction (such as
apartment buildings where loan
repayment is dependent upon
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16
See supra footnote 11. Additionally, certain
multifamily residential property may meet the
‘‘other credit needs’’ financing available to eligible
borrowers as authorized by sections 1.11(a)(1) and
2.4(a)(1) of the Act and referenced in §613.3000.
17
See Federal Financial Institutions Examination
Council (FFIEC) 031 and FFIEC 041—Instructions
for Preparation of Consolidated Reports of
Condition and Income.
apartment rental income) would not
qualify for this exclusion.
16
Loans used solely to acquire
undeveloped land would not qualify for
this exclusion; the credit facility would
also have to include financing for the
construction of one- to four-family
residential structures. Moreover, credit
facilities that do not finance the
construction of one- to four-family
residential structures (as defined above),
but instead solely finance improvements
such as the laying of sewers, water
pipes, and similar improvements to
land, would not qualify for this
exclusion. A credit facility that
combines the financing of land
development and the construction of
one- to four-family structures would
qualify for this exclusion.
2. Agricultural Land
We propose to exclude from the
HVCRE definition credit facilities
financing ‘‘agricultural land,’’ as defined
in FCA regulation § 619.9025, or real
estate used as an integral part of an
aquatic operation. Section 619.9025
defines ‘‘agricultural land’’ as ‘‘land
improved or unimproved which is
devoted to or available for the
production of crops and other products
such as but not limited to fruits and
timber or for the raising of livestock.’’
This exclusion would apply only to
financing for the agricultural and
aquatic needs of bona fide farmers,
ranchers, and producers and harvesters
of aquatic products under § 613.3000 of
FCA regulations. It would not apply to
loans for farm property construction and
land development purposes.
With one exception, we intend our
proposed agricultural land exclusion to
have the same scope as the agricultural
land exclusion of the FBRAs. The
FBRAs’ definition of agricultural land
has the same meaning as ‘‘farmland’’ in
their Call Report forms and
instructions.
17
They define farmland as
‘‘all land known to be used or usable for
agricultural purposes, such as crop and
livestock production. Farmland
includes grazing or pastureland,
whether tillable or not and whether
wooded or not.’’ Loans for farm property
construction and land development
purposes are not loans on ‘‘farmland,’’
and therefore such loans do not fall
within the agricultural land exclusion.
Unlike the FBRAs, we propose to
expressly include within the
agricultural land exclusion real estate
that is an integral part of an aquatic
operation.
As the FBRAs did in their final rule,
loans for land development purposes
and farm property construction would
not be eligible in this proposed rule for
the agricultural land exclusion from the
HVCRE exposure definition. Loans
made for land development purposes
would include loans made to finance
property improvements, such as laying
sewers or water pipes preparatory to
erecting new structures. Loans made for
farm property construction would
include loans made to finance the on-
site construction of industrial,
commercial, residential, or farm
buildings. For the purposes of this
exclusion, ‘‘construction’’ includes not
only construction of new structures, but
also additions or alterations to existing
structures and the demolition of existing
structures to make way for new
structures.
3. Loans on Existing Income Producing
Properties That Qualify as Permanent
Financings
As in the FBRA rule, we propose to
exclude from the definition of HVCRE
exposure credit facilities that finance
the acquisition or refinance of existing
income-producing real property secured
by a mortgage on such property, so long
as the cash flow generated by the real
property covers the debt service and
expenses of the property in accordance
with the System institution’s
underwriting criteria for permanent
loans. We also propose to exclude credit
facilities financing improvements to
existing income-producing real property
secured by a mortgage on such property.
Examiners may review the
reasonableness of a System institution’s
underwriting criteria for permanent
loans through the regular examination
process to ensure the real estate lending
policies are consistent with safe and
sound banking practices.
We believe this income-producing
property exclusion would address
certain concerns expressed in comment
letters from FCA’s 2014 proposed
HVCRE definition regarding
agribusiness and rural utility loans.
System institutions commented they did
not believe the definition of HVCRE was
intended to include agribusiness or
rural project financing transactions to
build processing and marketing
facilities or rural infrastructure. Under
this proposal, these types of loans could
qualify for the income-producing
property exclusion if the cash flow
being generated by the real property is
sufficient to support the debt service
and expenses of the real property in
accordance with the System
institution’s underwriting criteria for
permanent loans.
Agribusiness and rural project loans
that are not secured by existing income-
producing real property would not fall
under this exclusion. Such loans often
pose a greater credit risk than
permanent loans. We believe it is
appropriate to classify these loans as
HVCRE exposures and impose a 150
percent risk-weight given their
increased risk compared to other
commercial real estate exposures
(unless the loan satisfies one of the
other exclusions). However, as
discussed in section 5—Reclassification
as a Non-HVCRE Exposure section
below, a System institution would be
allowed to reclassify these HVCRE
exposures as a non-HVCRE exposure if
two conditions are met:
•Substantial completion of the
development or construction on the real
property has occurred; and
•the cash flow generated by the
property covers the debt service and
expenses on the property in accordance
with the System institution’s loan
underwriting standards for permanent
financings.
4. Certain Commercial Real Property
Projects
As in the FBRA rule, we propose to
exclude from the definition of HVCRE
exposure credit facilities for certain
commercial real property projects that
are underwritten in a safe and sound
manner in accordance with proposed
loan-to-value (LTV) limits and where
the borrower has contributed a specified
amount of capital to the project. A
commercial real property project loan
generally is used to acquire, develop,
construct, improve, or refinance real
property, and the primary source of
repayment is dependent on the sale of
the real property or the revenues from
third-party rent or lease payments.
Commercial real property project loans
do not include ordinary business loans
and lines of credit in which real
property is taken as collateral. As it
relates to the System, we believe this
exclusion is most relevant to
agribusiness (processing and marketing
entities and farm-related businesses)
and rural project loans.
In order to qualify for this exclusion,
a credit facility that finances a
commercial real property project would
be required to meet four distinct criteria.
First, the LTV ratio would have to be
less than or equal to the applicable
maximum set forth in proposed
Appendix A. Second, the borrower
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18
See 12 CFR part 365, subpart A, Appendix A
(FDIC); 12 CFR part 208, Appendix C (FRB); 12 CFR
part 34, Appendix A (OCC).
19
Section 1.10(a) of the Act and §614.4200(b)(1)
of FCA regulations require at least an 85 percent
LTV ratio for long-term real estate mortgage loans
that are comprised primarily of agricultural or rural
property, except for loans that have government
guarantees or are covered by private mortgage
insurance. Under §614.4200(b)(1), agricultural or
rural property includes agricultural land and
improvements thereto, a farm-related business, a
marketing or processing operation, a rural
residence, or real estate used as an integral part of
an aquatic operation.
20
Examination Bulletin FCA 2009–2, Guidance
for Evaluating the Safety and Soundness of FCS
Real Estate Lending (focusing on land in transition),
December 2009.
21
See FCA Informational Memorandum,
Guidance on Addressing Personal and Intangible
Property within Collateral Evaluation Policies and
Procedures (§614.4245), August 29, 2016; FCA
Examination Manual EM–22.6, Loan Portfolio
Management: Collateral Risk management, dated
August 20, 2014.
22
This interpretation is consistent with the
definitions of ‘‘unencumbered’’ and ‘‘marketable’’
in §615.5134 of our regulations.
23
We intend that the terms ‘‘as completed’’ and
‘‘as is,’’ as used in the definition of HVCRE
Continued
would have to contribute capital of at
least 15 percent of the real property’s
value to the project. Third, the 15
percent amount of contributed capital
would have to be contributed prior to
the institution’s advance of funds (other
than a nominal sum to secure the
institution’s lien on the real property).
Fourth, the 15 percent amount of
contributed capital would have to be
contractually required to remain in the
project until the loan could be
reclassified as a non-HVCRE exposure.
The proposed interpretations of terms
relevant to the four criteria for this
exclusion are discussed below.
a. Loan-to-Value Limits
To qualify for this exclusion from the
HVCRE exposure definition, the FBRAs’
rule requires that a credit facility be
underwritten in a safe and sound
manner in accordance with the
Supervisory Loan-to-Value Limits
contained in the Interagency Guidelines
for Real Estate Lending Policies.
18
These
Interagency Guidelines require banking
institutions, for real estate loans, to
establish internal LTV limits that do not
exceed specified supervisory limits
ranging from 65 percent for raw land to
85 percent for 1- to 4-family residential
and improved property.
The FCA has not adopted these
supervisory LTV limits.
19
Nevertheless,
FCA examination guidance from 2009
makes clear that FCA expectations are
consistent with the Interagency
Guidelines, including the supervisory
LTV limits.
20
We believe exposures
should satisfy these LTV limits to
qualify for this exclusion to the HVCRE
definition. We propose to adopt these
LTV limits, for the purpose of the
HVCRE definition only, in a new
Appendix A to part 628.
b. Contributed Capital
Under the proposal, cash,
unencumbered readily marketable
assets, paid development expenses out-
of-pocket, and contributed real property
or improvements would count as forms
of capital for purposes of the 15 percent
capital contribution criterion. A System
institution could consider costs
incurred by the project and paid by the
borrower prior to the advance of funds
by the System institution as out-of-
pocket development expenses paid by
the borrower.
The FBRAs’ version of the rule
provides that the value of contributed
real property means the appraised value
of real property contributed by the
borrower as determined under the
standards prescribed by the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 (12 U.S.C.
3339) (FIRREA). Because FCA is not
named in FIRREA as one of the Federal
financial regulatory agencies covered by
its real estate appraisal provisions, our
proposal does not expressly require that
the value must be determined under the
FIRREA standards; rather, we propose to
require that the value must be
determined in accordance with FCA
regulations at Subpart F of 12 CFR part
614. FCA’s collateral evaluation rules
are generally similar, although not
identical, to the FIRREA standards,
however, and therefore there should be
few substantive differences in the
approach to valuation.
FCA has long recognized that
Congress, through the enactment of
FIRREA, expressed a strong belief that
all financial transactions involving real
property collateral should be supported
by adequate and accurate collateral
evaluations. Congress also expressed the
belief that such collateral evaluations
should be based on standards and
guidelines that are consistently applied
by the financial and appraisal
industries. We believe that following the
collateral evaluation requirements of
FIRREA and the overarching beliefs of
Congress is an essential element of the
safe and sound lending activities
covered by the System. FCA’s collateral
evaluation regulations, at 12 CFR part
614, subpart F, are generally similar,
although not identical, to the FIRREA
appraisal requirements.
21
The value of the real property that
could count toward the 15 percent
contributed capital requirement would
be reduced by the aggregate amount of
any liens on the real property securing
the HVCRE exposure.
To ensure that tangible equity is
invested in the project, funds borrowed
from a third party (such as another
lender, an owner or parent organization,
or a related party) could count toward
the capital contribution as long as the
borrowed funds are not derived from,
related to, or encumber any collateral
that has been contributed to the project.
Additionally, the recognition of any
contribution of funds to a project would
have to be in conformance with safe and
sound lending practices and in
accordance with the System
institution’s underwriting criteria and
internal policies.
In addition, contributed property or
improvements would have to be directly
related to the project to be eligible to
count towards the capital contribution.
Real estate not developed as part of the
project would not be counted toward
the capital contribution.
We would interpret the term
‘‘unencumbered readily marketable
assets’’ to mean insured deposits,
financial instruments, and bullion in
which the System institution has a
perfected interest. For collateral to be
considered ‘‘readily marketable’’ by a
System institution, the institution’s
expectation would be that the financial
instrument and bullion would be salable
under ordinary circumstances with
reasonable promptness at a fair market
value determined by quotations based
on actual transactions, an auction or
similarly available daily bid and ask
price market.
22
Readily marketable
collateral should be appropriately
discounted by the institution consistent
with the institution’s usual practices for
making loans secured by such collateral.
Examiners may review the
reasonableness of a System institution’s
underwriting criteria to ensure the real
estate lending policies are consistent
with safe and sound banking practices.
c. Value Appraisal
Under the proposal, the 15 percent
capital contribution would be required
to be calculated using the real property’s
value. An appraised ‘‘as completed’’
value is preferred; however, an ‘‘as
completed’’ value appraisal may not
always be available, such as in the case
of purchasing raw land without plans
for development in the near term, which
would typically have an ‘‘as is’’ value
appraisal. Therefore, we propose to
permit the use of an ‘‘as is’’ appraisal,
if an ‘‘as completed’’ appraisal is not
available, for purposes of the 15 percent
capital contribution.
23
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exposure, would have the same meaning as in the
Interagency Appraisal and Evaluation Guidelines
(December 2, 2010), issued by the OCC, the FRB,
the FDIC, the Office of Thrift Supervision, and the
National Credit Union Administration. Under these
Guidelines, ‘‘as completed’’ reflects property’s
market value as of the time that development is
expected to be completed, and ‘‘as is’’ means the
estimate of the market value of real property in its
current physical condition, use, and zoning as of
the appraisal’s effective date.
24
See §614.4260(c), which sets forth the types of
real estate-related transactions that do not require
appraisals.
25
See 84 FR 68019, 68027 (December 13, 2019).
26
BL–070: Revised Capital Treatment for Certain
Water and Wastewater Exposures, November 8,
2018.
27
BL–070 does allow the reduced risk-weight for
exposures during routine repair, upgrade, or
maintenance projects that do not impede the
facility’s full operation.
28
FCA BL–053: Revised Regulatory Capital
Treatment for Certain Electric Cooperatives Assets,
February 12, 2007.
29
See §628.1(d)(3).
In addition, we would allow the use
of a collateral evaluation of the real
property instead of an appraisal to
determine the value, for purposes of the
HVCRE exposure definition, where our
appraisal regulations
24
permit collateral
evaluations to be used in lieu of
appraisals.
The FBRAs’ regulatory exclusion for
Certain Commercial Real Property
Projects specifies that an ‘‘as
completed’’ value appraisal must be
used. This is consistent with the
EGRRCPA’s statutory definition for the
Certain Commercial Real Property
Projects exclusion, which included only
appraised ‘‘as completed’’ values. As
explained by the FBRAs, the EGRRCPA
required this appraised ‘‘as completed’’
value for their regulations. In the
preamble of their final rule, the FBRAs
clarified their definition allows ‘‘as is’’
appraisals for raw land loans and
collateral evaluations for loans in
amounts under certain specified
thresholds in their appraisal
regulations.
25
However, the FBRAs did
not change the wording of the
EGRRCPA’s statutory definition in their
regulations to reflect this interpretation.
The EGRRCPA does not apply to System
institutions, and FCA is not required to
adopt the statutory definition.
Accordingly, we propose to deviate
from the statutory definition for Certain
Commercial Real Property Projects to
include ‘‘as is’’ appraisals and collateral
evaluations to align our regulation with
the FBRAs’ interpretation of the
definition.
d. Project
In this proposal, the 15 percent
capital contribution and the appraisal or
collateral evaluation would be measured
in relation to a ‘‘project.’’ Some credit
facilities for the acquisition,
development, or construction of real
property may have multiple phases as
part of a larger construction or
development project. In the case of a
project with multiple phases, in order
for a loan financing a phase to be
eligible for the contributed capital
exclusion, the phase must have its own
appraised value or an appropriate
evaluation in order for it to be deemed
a separate ‘‘project’’ for the purpose of
the 15 percent capital contribution
calculation. We expect that each project
phase being financed by a credit facility
have a proper appraisal or evaluation
with an associated ‘‘as completed’’ or
‘‘as is’’ value. Where appropriate and in
accordance with the System
institution’s applicable underwriting
standards, a System institution may
look at a multiphase project as a
complete project rather than as
individual phases.
5. Reclassification as a Non-HVCRE
Exposure
Under the proposal, a System
institution would be allowed to
reclassify an HVCRE exposure as a non-
HVCRE exposure when the substantial
completion of the development or
construction on the real property has
occurred and the cash flow generated by
the property covered the debt service
and expenses on the property in
accordance with the institution’s loan
underwriting standards for permanent
financings. We expect each System
institution to have prudent, clear, and
measurable underwriting standards,
which we may review through the
examination process.
6. Applicability Only to Loans Made
After Effective Date
In consideration of the changes this
rule would require, we propose that
only loans made after the effective date
of this rule would be subject to the
HVCRE risk-weighting requirements.
Loans made prior to the rule’s effective
date could continue to be risk-weighted
as if the rule had not been adopted.
After the effective date, when a
System institution modifies a loan or if
a project is altered in a manner that
materially changes the underwriting of
the credit facility (such as increases to
the loan amount, changes to the size and
scope of the project, or removing all or
part of the 15 percent minimum capital
contribution in a project), the institution
must treat the loan as a new exposure
and reevaluate the exposure to
determine whether or not it is an
HVCRE exposure.
C. Impact on Prior FCA Board Actions
FCA Bookletter BL–070 authorizes
System institutions to assign a reduced
risk-weight (lower than the 100 percent
risk-weight generally assigned to
commercial real estate exposures under
FCA regulation § 628.32(f)(1)) for rural
water and wastewater (RWW) facilities
that satisfy criteria.
26
BL–070 does not
permit this reduced risk-weight for
exposures when a RWW facility is not
fully operational due to initial
construction or major renovation;
instead, institutions must assign risk-
weights to these ‘‘major construction’’
exposures in accordance with Part 628
of our regulations.
27
If this proposed
regulation is adopted, BL–070 would
continue to assign risk-weights to these
‘‘major construction’’ exposures in
accordance with Part 628 as it would be
amended; in other words, an exposure
to a RWW facility that is not fully
operational due to initial construction
or major renovation would continue to
be assigned a risk-weight in accordance
with Part 628 (either as an HVCRE
exposure or as a corporate exposure
under § 628.32(f)(1), depending on
whether it satisfies the definition of
HVCRE exposure or not). Under BL–
070, a RWW exposure during
construction or major renovation, when
the facility is not fully operational, may
not be assigned a reduced risk-weight.
All other RWW exposures would
continue to receive reduced risk-weights
in accordance with BL–070.
FCA Bookletter BL–053 authorizes
System institutions to assign a reduced
risk-weight to certain electric
cooperative exposures, including for
some power plants that are in the
construction phase.
28
This treatment is
authorized under our reservation of
authority.
29
In the future, we may
consider whether the risk-weight
authorized by BL–053 remains
appropriate.
III. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), FCA hereby certifies that the
proposed rule would not have a
significant economic impact on a
substantial number of small entities.
Each of the banks in the System,
considered together with its affiliated
associations, has assets and annual
income in excess of the amounts that
would qualify them as small entities.
Therefore, System institutions are not
‘‘small entities’’ as defined in the
Regulatory Flexibility Act.
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List of Subjects in 12 CFR Part 628
Accounting, Agriculture, Banks,
Banking, Capital, Government
securities, Investments, Rural areas.
For the reasons stated in the
preamble, part 628 of chapter VI, title 12
of the Code of Federal Regulations is
proposed to be amended as follows:
PART 628—CAPITAL ADEQUACY OF
SYSTEM INSTITUTIONS
■1. The authority citation for part 628
continues to read as follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12,
2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3,
4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 8.0, 8.3, 8.4,
8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073,
2074, 2075, 2076, 2093, 2122, 2128, 2132,
2146, 2154, 2154a, 2160, 2202b, 2211, 2243,
2252, 2279aa, 2279aa–3, 2279aa–4, 2279aa–6,
2279aa–8, 2279aa–10, 2279aa–12); sec.
301(a), Pub. L. 100–233, 101 Stat. 1568, 1608
((12 U.S.C. 2154 note); sec. 939A, Pub. L.
111–203, 124 Stat. 1326, 1887 (15 U.S.C.
78o–7 note).
■2. Amend § 628.2 by adding paragraph
(6) to the definition of ‘‘Corporate
exposure’’ and a new definition, in
alphabetical order, for ‘‘High volatility
commercial real estate (HVCRE)
exposure’’ to read as follows:
§ 628.2 Definitions.
* * * * *
Corporate exposure ***
* * * * *
(6) A high volatility commercial real
estate (HVCRE) exposure;
* * * * *
High volatility commercial real estate
(HVCRE) exposure means:
(1) A credit facility secured by land or
improved real property that, prior to
being reclassified by the System
institution as a non-HVCRE exposure
pursuant to paragraph (6) of this
definition:
(i) Primarily finances, has financed, or
refinances the acquisition, development,
or construction of real property;
(ii) Has the purpose of providing
financing to acquire, develop, or
improve such real property into income
producing real property; and
(iii) Is dependent upon future income
or sales proceeds from, or refinancing
of, such real property for the repayment
of such credit facility.
(2) An HVCRE exposure does not
include a credit facility financing:
(i) The acquisition, development, or
construction of properties that are:
(A) One- to four-family residential
properties, provided that the dwelling
(including attached components such as
garages, porches, and decks) represents
at least 50 percent of the total appraised
value of the collateral secured by the
first or subsequent lien. Credit facilities
that do not finance the construction of
one- to four-family residential
structures, but instead solely finance
improvements such as the laying of
sewers, water pipes, and similar
improvements to land, do not qualify for
the one- to four-family residential
properties exclusion;
(B) [Reserved]
(C) Agricultural land, as defined in
§ 619.9025 of this chapter, or real estate
used as an integral part of an aquatic
operation. This provision applies only
to financing for the agricultural and
aquatic needs of bona fide farmers,
ranchers, and producers and harvesters
of aquatic products under § 613.3000 of
this chapter. This provision does not
apply to loans for farm property
construction and land development
purposes;
(ii) The acquisition or refinance of
existing income-producing real property
secured by a mortgage on such property,
if the cash flow being generated by the
real property is sufficient to support the
debt service and expenses of the real
property, in accordance with the System
institution’s applicable loan
underwriting criteria for permanent
financings;
(iii) Improvements to existing income
producing improved real property
secured by a mortgage on such property,
if the cash flow being generated by the
real property is sufficient to support the
debt service and expenses of the real
property, in accordance with the System
institution’s applicable loan
underwriting criteria for permanent
financings; or
(iv) Commercial real property projects
in which:
(A) The loan-to-value ratio is less than
or equal to the applicable loan-to-value
limit set forth in Appendix A to this
part;
(B) The borrower has contributed
capital of at least 15 percent of the real
property’s appraised, ‘‘as completed’’
value to the project. The use of an ‘‘as
is’’ appraisal is allowed in instances
where an ‘‘as completed’’ value
appraisal is not available. The use of an
evaluation of the real property instead
of an appraisal to determine the ‘‘as
completed’’ appraised value is allowed
if § 614.4260(c) of this chapter permits
evaluations to be used in lieu of
appraisals. The contribution may be in
the form of:
(1) Cash;
(2) Unencumbered readily marketable
assets;
(3) Paid development expenses out-of-
pocket; or
(4) Contributed real property or
improvements; and
(C) The borrower contributed the
amount of capital required by paragraph
(2)(iv)(B) of this definition before the
System institution advances funds
(other than the advance of a nominal
sum made in order to secure the System
institution’s lien against the real
property) under the credit facility, and
such minimum amount of capital
contributed by the borrower is
contractually required to remain in the
project until the HVCRE exposure has
been reclassified by the System
institution as a non-HVCRE exposure
under paragraph (6) of this definition.
(3) An HVCRE exposure does not
include any loan made prior to the
effective date of this rule.
(4) An HVCRE exposure does not
include a credit facility reclassified as a
non-HVCRE exposure under paragraph
(6) of this definition.
(5) Value of contributed real property:
For the purposes of this HVCRE
exposure definition, the value of any
real property contributed by a borrower
as a capital contribution is the appraised
value of the property as determined
under standards prescribed in
accordance with FCA regulations at
subpart F of part 614 of this chapter, in
connection with the extension of the
credit facility or loan to such borrower.
(6) Reclassification as a non-HVCRE
exposure: For purposes of this HVCRE
exposure definition and with respect to
a credit facility and a System
institution, a System institution may
reclassify an HVCRE exposure as a non-
HVCRE exposure upon:
(i) The substantial completion of the
development or construction of the real
property being financed by the credit
facility; and
(ii) Cash flow being generated by the
real property being sufficient to support
the debt service and expenses of the real
property, in accordance with the System
institution’s applicable loan
underwriting criteria for permanent
financings.
(7) [Reserved].
* * * * *
■3. Amend § 628.32 by adding
paragraph (j) to read as follows:
§ 628.32 General risk weights.
* * * * *
(j) High volatility commercial real
estate (HVCRE) exposures. A System
institution must assign a 150-percent
risk weight to an HVCRE exposure.
* * * * *
■4. Amend § 628.63 by adding entry
(b)(8) to Table 3 to § 628.63 to read as
follows:
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§ 628.63 Disclosures.
* * * * *
(b) * * *
(4) * * *
* * * * *
T
ABLE
3
TO
§ 628.63—C
APITAL
A
DEQUACY
*******
Quantitative disclosures ............................................................................ (b) Risk-weighted assets for:
*******
(8) HVCRE exposures;
*******
* * * * *
■5. Add Appendix A to Part 628 to read
as follows:
Appendix A to Part 628—Loan-to-Value
Limits for High Volatility Commercial
Real Estate Exposures
Table A sets forth the loan-to-value limits
specified in paragraph (2)(iv)(A) of the
definition of high volatility commercial real
estate exposure in § 628.2.
T
ABLE
A—L
OAN
-
TO
-V
ALUE
L
IMITS FOR
H
IGH
V
OLATILITY
C
OMMERCIAL
R
EAL
E
STATE
E
XPOSURES
Loan category Loan-to-value
limit
(percent)
Raw Land ............................................................................................................................................................................................. 65
Land development ............................................................................................................................................................................... 75
Construction: ........................
Commercial, multifamily,
1
and other non-residential .................................................................................................................... 80
1- to 4-family residential ............................................................................................................................................................... 85
Improved property ........................................................................................................................................................................ 85
Owner-occupied 1- to 4-family and home equity .........................................................................................................................
2
85
1
Multifamily construction includes condominiums and cooperatives.
2
If a loan is covered by private mortgage insurance, the loan-to-value (LTV) may exceed 85 percent to the extent that the loan amount in ex-
cess of 85 percent is covered by the insurance. If a loan is guaranteed by Federal, State, or other governmental agencies, the LTV limit is 97
percent.
The loan-to-value limits should be applied
to the underlying property that collateralizes
the loan. For loans that fund multiple phases
of the same real estate project (e.g., a loan for
both land development and construction of
an office building), the appropriate loan-to-
value limit is the limit applicable to the final
phase of the project funded by the loan;
however, loan disbursements should not
exceed actual development or construction
outlays. In situations where a loan is fully
cross-collateralized by two or more
properties or is secured by a collateral pool
of two or more properties, the appropriate
maximum loan amount under loan-to-value
limits is the sum of the value of each
property, less senior liens, multiplied by the
appropriate loan-to-value limit for each
property. To ensure that collateral margins
remain within the limits, System institutions
should redetermine conformity whenever
collateral substitutions are made to the
collateral pool.
Dated: August 12, 2021.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2021–17560 Filed 8–25–21; 8:45 am]
BILLING CODE 6705–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2021–0697; Project
Identifier MCAI–2020–01540–R]
RIN 2120–AA64
Airworthiness Directives; Leonardo
S.p.a. Helicopters
AGENCY
: Federal Aviation
Administration (FAA), DOT.
ACTION
: Notice of proposed rulemaking
(NPRM).
SUMMARY
: The FAA proposes to adopt a
new airworthiness directive (AD) for
certain Leonardo S.p.a. Model A109E
helicopters. This proposed AD was
prompted by reports of cracking in the
center fuselage frame assembly in the
intersection of the lateral pylon and
floor spar at station (STA) 1815 on the
left- and right-hand sides. This
proposed AD would require repetitive
inspections of the intersection of the
lateral pylon and floor spar at STA 1815
for cracking and, depending on the
findings, repair, as specified in a
European Union Aviation Safety Agency
(EASA) AD, which is proposed for
incorporation by reference (IBR). The
FAA is proposing this AD to address the
unsafe condition on these products.
DATES
: The FAA must receive comments
on this proposed AD by October 12,
2021.
ADDRESSES
: You may send comments,
using the procedures found in 14 CFR
11.43 and 11.45, by any of the following
methods:
•Federal eRulemaking Portal: Go to
https://www.regulations.gov. Follow the
instructions for submitting comments.
•Fax: (202) 493–2251.
•Mail: U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE,
Washington, DC 20590.
•Hand Delivery: Deliver to Mail
address above between 9 a.m. and 5
p.m., Monday through Friday, except
Federal holidays.
For EASA material that is proposed
for IBR in this AD, contact EASA,
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