Source: https://www.federalregister.gov/documents/2018/09/28/2018-20875/regulatory-capital-treatment-for-high-volatility-commercial-real-estate-hvcre-exposures
Timestamp: 2019-11-22 02:05:06
Document Index: 19788637

Matched Legal Cases: ['ART 324', 'art 3', '§\u20093', 'art 225', 'art 217', 'art 3', 'art 324', 'art 208', 'art 34', 'art 365', 'art 24', 'art 345', 'art 228', 'art 225']

A Proposed Rule by the Comptroller of the Currency, the Federal Reserve System, and the Federal Deposit Insurance Corporation on 09/28/2018
48990-49001 (12 pages)
PART 324—CAPITAL ADEQUACY OF FDIC--SUPERVISED INSTITUTIONS
https://www.federalregister.gov/d/2018-20875 https://www.federalregister.gov/d/2018-20875
Start Preamble Start Printed Page 48990
Comments should be directed to: OCC: Commenters are encouraged to submit comments through the Federal eRulemaking Portal or email, if possible. Please use the title “Regulatory Capital Treatment for High Volatility Commercial (HVCRE) Exposures 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.
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.
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 can be filtered by clicking on “View All” and then using the filtering tools on the left side of the screen.
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, comments will not be edited to remove Start Printed Page 48991any identifying or contact information. Public comments may also be viewed electronically or in paper in Room 3515, 1801 K Street NW (between 18th and 19th Streets NW), between 9:00 a.m. and 5:00 p.m. on weekdays.
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: comments@FDIC.gov. Include RIN 3064-AE90 on the subject line of the message.
Public Inspection: All comments received must include the agency name and RIN 3064-AE90 for this rulemaking. All comments received will be posted without change to http://www.fdic.gov/​regulations/​laws/​federal/​, 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 by telephone at (877) 275-3342 or (703) 562-2200.
OCC: Mark Ginsberg, Senior Risk Expert (202) 649-6983; or Benjamin Pegg, Risk Expert (202) 649-7146, Capital and Regulatory Policy; or Carl Kaminski, Special Counsel, or Rima Kundnani, Attorney, Chief Counsel's Office, (202) 649-5490, for persons who are hearing impaired, TTY, (202) 649-5597, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.
FDIC: Benedetto Bosco, Chief, Capital Policy Section; bbosco@fdic.gov; David Riley, Senior Policy Analyst, Capital Policy Section; dariley@fdic.gov; Stephanie Lorek, Senior Policy Analyst, slorek@fdic.gov; Michael Maloney, Senior Policy Analyst, mmaloney@fdic.gov; regulatorycapital@fdic.gov; Capital Markets Branch, Division of Risk Management Supervision, (202) 898-6888; Beverlea S. Gardner, Senior Examination Specialist, bgardner@fdic.gov, Policy and Program Development; Michael Phillips, Acting Supervisory Counsel, mphillips@fdic.gov; Catherine Wood, Counsel, cawood@fdic.gov; or Alexander Bonander, Attorney, abonander@fdic.gov; Supervision and Legislation Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
In 2013, 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) adopted a revised regulatory capital rule (capital rule) that, among other things, addressed weaknesses in the regulatory framework that became apparent in the financial crisis of 2007-08.[1] The capital rule strengthened the capital requirements applicable to banking organizations [2] supervised by the agencies by improving both the quality and quantity of regulatory capital and increasing risk-sensitivity. To better capture the risk of certain kinds of real estate exposures, the capital rule defines a “high volatility commercial real estate (HVCRE) exposure” as a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property. The HVCRE exposure definition generally excludes ADC credit facilities that finance one- to-four family residential properties, community development, or agricultural land exposures, and commercial real estate projects where the borrower meets certain contributed capital requirements and other prudential criteria.[3] HVCRE exposures were observed to have increased risk characteristics relative to other credit exposures,[4] and thus were assigned a heightened risk weight of 150 percent under the capital rule.
On May 24, 2018, EGRRCPA became law. Section 214 of EGRRCPA [5] amends Start Printed Page 48992the Federal Deposit Insurance Act (FDI Act) [6] by adding a new section 51 to provide a statutory definition of a high volatility commercial real estate acquisition, development, or construction (HVCRE ADC) loan. The statute states the agencies may only require a depository institution to assign a heightened risk weight to an HVCRE exposure, as defined under the capital rule, if such exposure is an HVCRE ADC loan under EGRRCPA. The statutory HVCRE ADC loan definition excludes any loan made prior to January 1, 2015. Section 214 was effective upon enactment of the statute.[7]
The agencies issued an interagency statement on July 6, 2018 (interagency statement) that provided information on rules and associated reporting requirements that the agencies jointly administer and that EGRRCPA immediately affected.[8] With respect to section 214, the interagency statement provides that institutions may use available information to reasonably estimate and report only HVCRE ADC loans in their Consolidated Reports of Condition and Income (Call Report) [9] and may refine these estimates in good faith as they obtain additional information. The interagency statement also states that institutions will not be required to amend previously filed regulatory reports as these estimates are adjusted. As an alternative to reporting HVCRE ADC loans, the interagency statement indicates that an institution may continue to report and risk-weight HVCRE exposures in a manner consistent with the current instructions to the Call Report, until the agencies take further action. Further, to avoid the regulatory burden associated with different definitions for HVCRE exposures within a single organization, the interagency statement confirms that the Board will not take action to require a bank holding company, savings and loan holding company, or intermediate holding company of a foreign bank to estimate and report HVCRE on the FR Y-9C [10] consistent with the existing regulatory reporting requirements and reporting form instructions if the holding company reports HVCRE in the same manner as its subsidiary institution(s).
In accordance with section 214 of EGRRCPA, the agencies are proposing to revise the HVCRE exposure definition in section 2 of the capital rule to conform to the statutory definition of an HVCRE ADC loan.[11] The revised definition of an HVCRE exposure would be applicable to the calculation of risk-weighted assets under both the standardized approach and the internal ratings-based (“advanced approaches”) approach.[12] A banking organization that calculates its risk-weighted assets under the advanced approaches of the capital rule would refer to the definition of an HVCRE exposure in section 2 of the capital rule for purposes of identifying wholesale exposure categories and wholesale exposure subcategories.[13] Other than the definition change, no change to the calculation of risk-weighted assets is being proposed. Loans that meet the revised definition of an HVCRE exposure would receive a 150 percent risk weight under the capital rule's standardized approach.[14]
Section 214 excludes from the statutory definition of HVCRE ADC loan any loan made prior to January 1, 2015.[15] Unless a lower risk weight would apply, banking organizations may apply a 100 percent risk weight to ADC loans originated prior to January 1, 2015, that were classified as an HVCRE exposure under the superseded HVCRE exposure definition provided the loans are not past due 90 days or more or on nonaccrual. For ADC exposures issued on or after January 1, 2015, banking organizations would follow the interagency statement that permits them to either apply the statute on a best efforts basis or classify HVCRE exposures according to the superseded definition until the final rule is effective.
By its terms, the statutory definition of an HVCRE ADC loan applies to depository institutions. The Board has considered the statutory definition of HVCRE ADC loan and the appropriateness of applying the definition to holding companies in addition to depository institutions. The application of separate definitions for HVCRE ADC loans at the depository institution and for HVCRE exposures at Start Printed Page 48993the holding company levels within an organization could result in undue burden without contributing meaningfully to any regulatory objective. Accordingly, the proposal would apply the revised definition of an HVCRE exposure to all Board-regulated institutions that are subject to the Board's capital rule, including bank holding companies, savings and loan holding companies, and intermediate holding companies of foreign banking organizations. The Board would make conforming changes to the instructions for regulatory reports for holding companies that are Board-regulated institutions, including to Schedule HC-R, Part II of the FR Y-9C. Similarly, the agencies would make conforming changes to the Call Report instructions.
The agencies are revising the definition of an HVCRE exposure in the capital rule to conform to the statutory definition of an HVCRE ADC loan. Additionally, to facilitate the consistent application of the revised HVCRE exposure definition, the agencies propose to interpret terms not defined in the statutory definition of an HVCRE ADC loan. The agencies would generally look to substantially similar or the same terms in the agencies' regulations or the Call Report instructions.
Section 214 of EGRRCPA defines an HVCRE ADC loan as “a credit facility secured by land or improved real property.” [16] While the statute does not define “a credit facility secured by land or improved real property,” the Call Report instructions provide a definition for a “loan secured by real estate.” To ensure consistent reporting and because the two terms appear substantially similar, the agencies interpret the term “credit facility secured by land or improved real property” for the purpose of the revised HVCRE exposure definition in a manner that is consistent with the current Call Report definition for “a loan secured by real estate.” To meet the Call Report definition of “a loan is secured by real estate,” 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.[17] As a result, the agencies intend to interpret a “credit facility secured by land or improved real property” as a facility that meets this collateral criterion.
Section 214 of EGRRCPA provides that a credit facility that is secured by land or improved real property is required to meet three criteria before being classified as an HVCRE ADC loan. 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 real property. Finally, the repayment of the credit facility must depend upon future income or sales proceeds from, or refinancing of, such real property. The proposal will incorporate these criteria into the revised definition of an HVCRE exposure. Under the proposal, the determination of whether or not a loan is considered an HVCRE exposure under the revised definition would be made once, at the loan's origination.
In addition, the agencies' propose to interpret that other land loans (generally loans secured by vacant land except land known to be used for agricultural purposes) would be included in the scope of the revised HVCRE exposure definition. This approach would be consistent with the Call Report's inclusion of other land loans with construction and development loans.
Question 2: The agencies request comment on whether the terms “secured by land or improved real property,” “primarily finances,” and “income-producing real property” are clear or whether further discussion or interpretation would be needed. The agencies also request comment on whether their proposed interpretations of these terms are appropriate and whether loans secured by vacant land except agricultural land should be included in the scope of the revised HVCRE exposure definition.
Consistent with section 214, the revised definition of an HVCRE exposure would exclude credit facilities financing the acquisition, development, or construction of properties that are one- to four-family residential properties. The agencies are generally aligning the scope of exposures that finance acquisition, development, or construction of one- to four-family residential properties under the capital rule with the definition of a one- to four-family residential property provided in the codified interagency real estate lending standards.[18] The interagency real estate lending standards define a one- to four-family residential property as a property containing fewer than five individual dwelling units, including manufactured homes permanently affixed to the underlying property (when deemed to be real property under state law). The interagency real estate lending standards further state that the construction of condominiums and cooperatives are multifamily construction. Accordingly, loans to finance the construction of condominiums and cooperatives would generally not be included in the scope of the one- to four-family residential properties exclusion under the revised HVCRE exposure definition.[19] Additionally, the agencies are proposing that credit facilities for the purpose of the acquisition, development, or construction of properties that are one- to four-family residential properties would include both loans to construct one- to four-family residential structures and loans that combine the land acquisition, development, or construction of one- to four-family structures, including lot development loans. However, loans used solely to acquire undeveloped land would not be within the scope of one- to four-family residential properties exclusion regardless of how the land is zoned.
Question 3: The agencies invite comment on whether their proposed interpretations of the scope of the one- to four-family residential properties exclusion for purposes of the revised HVCRE exposure definition are appropriate and clear, including which types of townhomes, condominiums, cooperatives, and mobile home-related Start Printed Page 48994loans are excluded. The agencies also invite comment on whether it is appropriate to include one- to four- family lot development loans within the scope of this exclusion.
Consistent with section 214, the revised HVCRE exposure definition will exclude loans financing the acquisition, development, or construction of real property that would qualify as an investment in community development. For purposes of this exclusion, the proposal refers to the agencies' Community Reinvestment Act (CRA) regulations and the definition of community development investment in these regulations.[20] Accordingly, this exclusion would apply to credit facilities that finance the acquisition, development, or construction of real property projects for which the primary purpose is community development, as defined by the agencies' CRA regulations, which generally includes affordable housing, community services targeted to low- and moderate-income individuals, and various forms of economic development and small business financing. Under the agencies' CRA regulations, loans have to be evaluated to determine whether they meet the criteria for community development. For example, an ADC loan that is conditionally taken out with U.S. Small Business Administration section 504 financing would have to be evaluated against the criteria for community development in order to determine if the loan would qualify for this exclusion.
Question 4: The agencies invite comment on whether the proposed interpretation of the term “community development” in the revised definition of HVCRE exposure is appropriate and clear, or whether it requires further discussion or interpretation.
Consistent with section 214, the revised HVCRE exposure definition will exclude credit facilities financing the acquisition, development, or construction of agricultural land. The Call Report instructions include a definition for “farmland,” which excludes loans for farm property construction and land development purposes. As used in the Call Report, the term “farmland” includes all land known to be used or usable for agricultural purposes. To ensure consistent reporting, the agencies propose that “agricultural land” for the purpose of the revised HVCRE exposure definition would have the same meaning as “farmland,” as used in the Call Report instructions.[21]
Question 5: The agencies invite comment on whether their proposed interpretation of the term “agricultural land” in the revised definition of an HVCRE exposure is appropriate and clear, or whether it requires further discussion or interpretation.
In addition to the exclusions described above, the revised HVCRE exposure definition will exclude additional categories of exposures. Consistent with the statutory definition of an HVCRE ADC loan in section 214, the revised HVCRE exposure definition will exclude credit facilities for 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 a depository institution's underwriting criteria for permanent loans. The revised HVCRE exposure definition similarly excludes credit facilities financing improvements to existing income-producing real property secured by a mortgage on such property. The agencies may review the reasonableness of a depository institution's underwriting criteria for permanent loans through the regular supervisory process.
Question 6: The agencies invite comment on whether the term “permanent financings” in the revised definition of an HVCRE exposure is clear or whether further discussion or interpretation would be appropriate.
Consistent with section 214, the revised definition of an HVCRE exposure will exclude certain commercial real property projects that have been underwritten in accordance with supervisory underwriting standards, and when the borrower has contributed a specified amount of capital to the project. In order to qualify for this exclusion from the revised HVCRE exposure definition, a credit facility that finances a commercial real property project will be required to meet four distinct criteria. First, the loan-to-value ratio is less than or equal to the applicable supervisory maximum. Under the interagency real estate lending standards, maximum loan-to-value ratios vary from 65 to 85 percent, depending on the applicable loan category.[22] Second, the borrower has contributed capital of at least 15 percent of the real property's appraised “as completed” value to the project. Third, the 15 percent amount is contributed prior to the institution's advance of funds other than a nominal sum to secure the depository institution's lien on the real property. Fourth, the 15 percent amount of contributed capital is contractually required to remain in the project until the loan can be reclassified as a non-HVCRE exposure. Each of the four proposed criteria aligns with the corresponding statutory criterion under section 214 for exclusion from the statutory definition of an HVCRE ADC loan. The proposed interpretations of terms relevant to the four criteria for exclusion of a credit facility that finances a commercial real property project are discussed in further detail below.
Question 7: The agencies invite comment on whether their proposed interpretation of the 15 percent contributed capital exclusion is appropriate and clear or whether further discussion or interpretation would be Start Printed Page 48995appropriate. What other issues, if any, relating to the contributed capital exclusion require interpretation? What issues are there relating to the contribution of cash, unencumbered readily marketable assets, real property or improvements that require interpretation? What expenses should or should not qualify as development expenses and are there any other issues relating to paid development expenses that would require interpretation? The agencies also invite comment on whether it is appropriate and clear that the cross-collateralization of land in a project would not be included as contributed real property for purposes of the contributed capital exclusion.
Under the revised HVCRE exposure definition, the 15 percent capital contribution will be required to be calculated using the real property's appraised “as completed” value. 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, the agencies would permit the use of an “as is” appraisal, where applicable, for purposes of the 15 percent capital contribution. In addition, the agencies' regulations permit the use of an evaluation in place of an “as completed” value appraisal for a commercial real estate transaction under $500,000 that is not secured by a single one-to-four family residential property.[23] The agencies note that section 214 does not distinguish between credit exposures based on size; however, the agencies' appraisal regulations permit the use of evaluations under certain circumstances. The agencies thus would allow the use of an evaluation to replace the “as completed” appraised value, for purposes of the revised HVCRE exposure definition, for transactions under $500,000 that are not secured by a single one- to four-family residential property and for certain transactions with values of less than $400,000 involving real property or an interest in real property that is located in a rural area.[24]
Under the revised HVCRE exposure definition, when considering whether a credit facility is excluded as a “certain commercial real property project” as described above, the 15 percent capital contribution calculation and the “as completed” value appraisal are measured in relation to a “project.” The agencies recognize that 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. The agencies are proposing that in the case of a project with multiple phases or stages, in order for a loan financing a phase or stage to be eligible for the contributed capital exclusion, the phase or stage must have its own appraised “as completed” value or an appropriate evaluation in order for it to be deemed a separate “project” for purposes of the 15 percent capital contribution calculation.
Question 9: The agencies invite comment on whether their proposed interpretation of the term “project” is appropriate and clear, and whether the term “project” requires further discussion or interpretation.
Consistent with section 214, under the proposal, a banking organization may 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 covers the debt service and expenses on that property in accordance with the banking organization's loan underwriting standards for permanent financings.
Question 11: The agencies invite comment on the potential advantages and disadvantages of incorporating the agencies' interpretations of the terms used in the revised HVCRE exposure definition into the rule text or in another published format. What type of information should be included? What, if any, additional aspects of the revised HVCRE exposure definition, or its application and usage, should be included?
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 will be extended for three years, with revision. The information collection requirements contained in this proposed rulemaking have been submitted by the OCC and FDIC to OMB for review and approval 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). The Board reviewed the proposed rule under the authority delegated to the Board by OMB.
All comments will become a matter of public record. Comments on aspects of this notice that may affect reporting, recordkeeping, or disclosure requirements and burden estimates should be sent to the addresses listed in Start Printed Page 48996the ADDRESSES section of this document. A copy of the comments may also be submitted to the OMB desk officer for the agencies by mail to U.S. Office of Management and Budget, 725 17th Street NW, #10235, Washington, DC 20503; facsimile to (202) 395-6974; or email to oira_submission@omb.eop.gov, Attention, Federal Banking Agencies Desk Officer.
Current Actions: The proposal would amend the regulatory capital rule to conform the definition of HVCRE exposure to the statutory definition of HVCRE ADC loan. Because the agencies' regulatory capital rules require respondents to disclose and keep a record of their amount of HVCRE exposures, this definitional change revises respondents' disclosure and recordkeeping requirements associated with the agencies' regulatory capital rules. This amendment, however, will not result in changes to the burden. In an effort to be consistent across the agencies, the agencies are applying a conforming methodology for calculating the burden estimates. The agencies are also updating the number of respondents based on the current number of supervised entities. The agencies believe that any changes to the information collections associated with the proposed rule are the result of the conforming methodology and updates to the respondent count, and not the result of the proposed rule changes.
Disclosure (Initial setup)—280.
Disclosure (Ongoing quarterly)—35.
As of June 30, 2018, the OCC supervises 886 small entities.[25]
Therefore, the OCC certifies that the proposed rule would not have a significant economic impact on a Start Printed Page 48997substantial 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).[26] As of June 30, 2018, there were approximately 3,304 small bank holding companies, 216 small savings and loan holding companies, and 535 small SMBs.
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 of 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 the Supplemental Information, the proposal would 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. To facilitate the consistent application of the revised HVCRE exposure definition, the proposal also provides that the Board would generally look to substantially similar terms in relevant regulations or the Call Report instructions for interpretation of undefined terms used in section 214, where applicable.
For purposes of the standardized approach, loans that meet the revised definition of an HVCRE exposure would receive a 150 percent risk weight under the capital rule's standardized approach. A banking organization that calculates its risk-weighted assets under the advanced approaches of the capital rule would refer to the definition of an HVCRE exposure in section 2 of the capital rule for purposes of identifying wholesale exposure categories and wholesale exposure subcategories. Based upon data reported on the FR Y-9C and on Call Report information, as of June 30, 2018, about 14 percent of state member banks, bank holding companies, and savings and loan holding companies report holdings of HVCRE exposures.
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 Small Savings and Loan Holding Company Policy Statement, which applies to bank holding companies and savings and loan holding companies with less than $3 billion in total assets that also meet certain additional criteria.[27] 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.
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.[28] However, a regulatory flexibility analysis is not required if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. 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.[29] 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.
The FDIC supervises 3,604 depository institutions,[30] of which 2,804 are considered small entities for the purposes of RFA.[31] According to recent data, 2,472 small, FDIC-supervised institutions report holding some volume of acquisition, development, and construction loans, while 770 report holding some volume of HVCRE loans. Therefore, the FDIC estimates that the proposed rule is likely to affect a substantial number, 770 (27.5 percent), of small, FDIC-supervised institutions.[32]
This proposal would remove certain loans from the definition of an HVCRE exposure and therefore, would reduce the risk weight from 150 percent to 100 percent on some of the HVCRE loans held in portfolio by small FDIC-supervised institutions, resulting in a modest reduction in their risk-based capital requirements. Assuming all HVCRE loans reported by small, FDIC-supervised institutions were weighted at 100 percent and that covered institutions would maintain the same ratio of risk-based capital to risk-weighted assets after the proposal goes into effect, the maximum potential effect of the proposed rule would result in an estimated decline of $183 million (0.8 percent) in required risk-based capital for small, FDIC-insured institutions, or $237,000 per institution.[33]
Start Printed Page 48998
The proposed rule could pose some administrative costs for covered institutions. It is likely that covered institutions who hold some volume of HVCRE loans will incur some costs to evaluate their portfolios to determine if they are excluded from the proposed definition of HVCRE. It is difficult to accurately estimate the costs associated with evaluating each institution's portfolio of HVCRE because it depends on the characteristics of each institution's portfolio, the resources each institution has to manage these assets, and the labor decisions of senior management at each institution. However, the FDIC assumes that each institution will require 40 hours of labor on average to complete the review. Assuming an hourly cost of $75.82,[34] that amounts to $3,033 per institution or $2,335,410 for all small, FDIC-supervised institutions. These administrative costs amount to 0.15 percent of average non-interest expense for small, FDIC-supervised institutions directly affected by the proposed rule.[35]
The proposed rule is likely to reduce capital requirements for some loans currently classified as an HVCRE exposure, which could increase the volume of lending by small, FDIC-supervised institutions. The FDIC believes that this effect will likely be small given that the proposed amendments only affect a subset of HVCRE loans, which represent a small portion of total assets for small FDIC-supervised institutions. Finally, reductions in required capital could make institutions more vulnerable in the event of an economically stressful scenario. Since the changes affect only a narrowly defined segment of institutions' loan portfolios, the FDIC believes any increase in risk resulting from the changes is unlikely to be material.
Section 722 of the Gramm-Leach-Bliley Act [36] 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:
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.
Asset risk—weighting methodologies
Asset risk—weighting methodologies,
For the reasons set out in the joint preamble, the OCC proposes to amend 12 CFR part 3 as follows.
2. Amend § 3.2 by revising the definition of a “high volatility commercial real estate (HVCRE) exposure” as follows:
(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 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—
4. Section 217.2 is amended by revising the definition of a “high volatility commercial real estate (HVCRE) exposure” as follows:
(A) One- to four-family residential properties;Start Printed Page 49000
(6) Reclassification as a non-HVCRE exposure. For purposes of this definition of HVCRE exposure and with respect to a credit facility and an Board-regulated institution, an Board-regulated institution may reclassify an HVCRE exposure as a non-HVCRE exposure upon—
6. Section 324.2 is amended by revising the definition of a “high volatility commercial real estate (HVCRE) exposure” as follows:
(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 —
(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 Start Printed Page 49001contractually 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;
(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—
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. Banking organizations subject to the agencies' capital rule include national banks, state member banks, insured state nonmember banks, savings associations, and top-tier bank holding companies and savings and loan holding companies domiciled in the United States not subject to the Board's Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (12 CFR part 225, appendix C), excluding certain savings and loan holding companies that are substantially engaged in insurance underwriting or commercial activities or that are estate trusts, and bank holding companies and savings and loan holding companies that are employee stock ownership plans.
3. See 12 CFR 217.2 (Board); 12 CFR 3.2 (OCC); 12 CFR 324.2 (FDIC).
4. See 12 CFR part 217 (Board); 12 CFR part 3 (OCC); 12 CFR part 324 (FDIC).
5. Public Law 115-174, 132 Stat. 1296 (2018). Section 214 of EGRRCPA adds a new Section 51 to the FDI Act, stating that the appropriate Federal banking agencies may only require a depository institution to assign a heightened risk weight to a high volatility commercial real estate (HVCRE) exposure (as such term is defined under 12 CFR 324.2, as of October 11, 2017, or if a successor regulation is in effect as of the date of the enactment of this section, such term or any successor term contained in such successor regulation) under any risk-based capital requirement if such exposure is an HVCRE ADC loan.
HVCRE ADC Loan is defined for the purposes of section 51 and with respect to a depository institution, as a credit facility secured by land or improved real property that, prior to being reclassified by the depository institution as a non-HVCRE ADC loan pursuant to subsection (d)—(A) primarily finances, has financed, or refinances the acquisition, development, or construction of real property; (B) has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property; and (C) is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility;
It does not include a credit facility financing—(A) the acquisition, development, or construction of properties that are—(i) one- to four-family residential properties; (ii) real property that would qualify as an investment in community development; (iii) agricultural land; (B) 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 institution's applicable loan underwriting criteria for permanent financings; (C) 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 institution's applicable loan underwriting criteria for permanent financings; or (D) commercial real property projects in which—(i) the loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio as determined by the appropriate Federal banking agency; (ii) 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—(I) cash; (II) unencumbered readily marketable assets; (III) paid development expenses out-of-pocket; or (IV) contributed real property or improvements; and (iii) the borrower contributed the minimum amount of capital described under clause (ii) before the depository institution advances funds (other than the advance of a nominal sum made in order to secure the depository 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 credit facility has been reclassified by the depository institution as a non-HVCRE ADC loan under subsection (d); Further, it does not include any loan made prior to January 1, 2015; and does not include a credit facility reclassified as a non-HVCRE ADC loan under subsection (d).
Value of Contributed Real Property. 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. See 12 U.S.C. 1811 et seq.
7. On October 27, 2017, the agencies issued a proposal, titled, Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996. 82 FR 49984 (October 27, 2017). In connection with that proposal, the agencies requested comment on a definition, “high volatility acquisition, development, or construction (HVADC) exposure,” that would have replaced HVCRE in the capital rule. In light of section 214 of EGRRCPA, the agencies will take no further action regarding the HVADC aspect of the proposal. Other aspects of the October 2017 proposal, including simplifications to regulatory capital adjustments and deductions, are still under consideration.
8. 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).
9. OMB Control Nos.: OCC, 1557-0081; Board, 7100-0036; and FDIC, 3064-0052.
10. Consolidated Financial Statements for Holding Companies, OMB Control No.: Board, 7100-0128.
11. See 12 CFR 217.2 (Board); 12 CFR 3.2 (OCC); 12 CFR 324.2 (FDIC).
12. See 12 CFR 217 subparts D and E (Board); 12 CFR 3 subparts D and E (OCC); 12 CFR 324 subparts D and E (FDIC).
13. See 12 CFR 217.131 (Board); 12 CFR 3.131 (OCC); 12 CFR 324.131 (FDIC).
14. See 12 CFR 217.32(j) (Board); 12 CFR 3.32(j) (OCC); 12 CFR 324.32(j) (FDIC).
15. On January 1, 2015, the heightened risk weight for HVCRE exposures became effective for all banking organizations.
16. See supra fn. 6.
17. See Federal Financial Institutions Examination Council, Instructions for Preparation of Consolidated Reports of Condition and Income: FFIEC 031 and FFIEC 041, GLOSSARY A-58 (2018); and FFIEC 051, GLOSSARY A-74 (2018).
18. 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).
19. As an alternative to the interagency real estate lending standards, the agencies considered alignment with the definition of a one- to-four family residential property in the Call Report instructions for purposes of the HVCRE exposure exclusion. However, the Call Report's usage of the one- to-four family residential property definition—as a category of permanent financings—as well as the Call Report's distinct additional definition for “residential construction loans” are for different reporting purposes. See Call Report instructions for Schedule RC-C, Part I, Item 1.c (“Loans secured by 1-4 family residential properties”) and Item 1.a.(1) (“1-4 family residential construction loans”).
20. 12 CFR part 24 (OCC); 12 CFR part 345 (FDIC); 12 CFR part 228 (Board).
21. For the definition of loans secured by farmland, refer to the Call Report Instructions for Schedule RC-C, Part I, Item 1.b.
22. See supra fn. 17.
23. 83 FR 15019 (April 9, 2018).
24. Section 103 of EGRRCPA provides an exclusion to the appraisal requirements for certain transactions with values of less than $400,000 involving real property or an interest in real property that is located in a rural area. This exclusion was effective upon EGRRCPA's enactment.
25. 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.
26. 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).
27. See 12 CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225, appendix C; 12 CFR 238.9.
29. 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.
30. FDIC-supervised institutions are set forth in 12 U.S.C. 1813(q)(2).
31. FDIC Call Report, March 31st, 2018.
34. Estimated total hourly compensation of Financial Analysts in the Depository Credit Intermediation sector as of March 2018. The estimate includes the May 2017 90th 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 March 2018 (2.28 percent) and grossed up by 55.03 percent to account for non-monetary compensation as reported by the March 2018 Employer Costs for Employee Compensation Data.
35. FDIC Call Report, March 31st, 2018.