Regulatory Capital Treatment for High Volatility Commercial Real Estate (HVCRE) Exposures, 48990-49001 [2018-20875]

Download as PDF 48990 Proposed Rules Federal Register Vol. 83, No. 189 Friday, September 28, 2018 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 3 [Docket ID OCC–2018–0026] RIN 1557–AE48 FEDERAL RESERVE SYSTEM 12 CFR Part 217 [Regulation Q; Docket No. R–1621] RIN 7100—AF15 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 324 RIN 3064—AE90 Regulatory Capital Treatment for High Volatility Commercial Real Estate (HVCRE) Exposures Office of the Comptroller of the Currency, Treasury; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation. ACTION: Notice of proposed rulemaking. AGENCY: The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) are proposing to amend the regulatory capital rule to revise the definition of ‘‘high volatility commercial real estate (HVCRE) exposure’’ to conform to the statutory definition of ‘‘high volatility commercial real estate acquisition, development, orconstruction (HVCRE ADC) loan,’’ in accordance with section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Additionally, to facilitate the consistent application of the revised HVCRE exposure definition, the agencies propose to interpret certain terms in the revised HVCRE exposure definition generally consistent with amozie on DSK3GDR082PROD with PROPOSALS1 SUMMARY: VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 their usage in other relevant regulations or the instructions to the Consolidated Reports of Condition and Income (Call Report), where applicable, and request comment on whether any other terms in the revised definition would also require interpretation. DATES: Comments must be received by November 27, 2018. ADDRESSES: 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. • Click on the ‘‘Help’’ tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting public comments. • Email: regs.comments@ occ.treas.gov. • Mail: Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E–218, Washington, DC 20219. • Hand Delivery/Courier: 400 7th Street SW, Suite 3E–218, Washington, DC 20219. • Fax: (571) 465–4326. Instructions: You must include ‘‘OCC’’ as the agency name and ‘‘Docket ID OCC–2018–0026’’ in your comment. In general, the OCC will enter all comments received into the docket and publish them on the Regulations.gov website without change, including any business or personal information that you provide such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. You may review comments and other related materials that pertain to this PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 rulemaking action by any of the following methods: • Viewing Comments Electronically: Go to www.regulations.gov. Enter ‘‘Docket ID OCC–2018–0026’’ in the Search box and click ‘‘Search.’’ Click on ‘‘Open Docket Folder’’ on the right side of the screen and then ‘‘Comments.’’ Comments can be filtered by clicking on ‘‘View All’’ and then using the filtering tools on the left side of the screen. • Click on the ‘‘Help’’ tab on the Regulations.gov home page to get information on using Regulations.gov. Supporting materials may be viewed by clicking on ‘‘Open Docket Folder’’ and then clicking on ‘‘Supporting Documents.’’ The docket may be viewed after the close of the comment period in the same manner as during the comment period. • Viewing Comments Personally: You may personally inspect comments at the OCC, 400 7th Street SW, Washington, DC 20219. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 649–6700 or, for persons who are hearing impaired, TTY, (202) 649–5597. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect comments. Board: You may submit comments, identified by Docket No. R–1621; RIN 7100–AF–15, by any of the following methods: • Agency website: https:// www.federalreserve.gov. Follow the instructions for submitting comments at https://www.federalreserve.gov/ generalinfo/foia/ProposedRegs.cfm. • Email: regs.comments@ federalreserve.gov. Include docket number and RIN in the subject line of the message. • FAX: (202) 452–3819 or (202) 452– 3102. • Mail: Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551. All public comments will be made available on the Board’s website at https://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 E:\FR\FM\28SEP1.SGM 28SEP1 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules any 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. FDIC: You may submit comments, identified by RIN 3064–AE90, by any of the following methods: • Agency website: https:// www.FDIC.gov/regulations/laws/ federal/propose.html. Follow instructions for submitting comments on the Agency website. • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. • Hand Delivered/Courier: Comments may be hand-delivered to the guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m. • Email: 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 https://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. FOR FURTHER INFORMATION CONTACT: 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. Board: Constance M. Horsley, Deputy Associate Director, (202) 452–5239; Elizabeth MacDonald, Manager, (202) 475–6216; Andrew Willis, Senior Supervisory Financial Analyst, (202) 912–4323; Matthew McQueeney, Supervisory Financial Analyst (202) 452–2942; Sean Healey, Supervisory Financial Analyst, (202) 912–4611, Division of Supervision and Regulation; or Benjamin McDonough, Assistant General Counsel (202) 452–2036; David Alexander, Counsel, (202) 452–2877; Mary Watkins, Attorney (202) 452–3722, Legal Division, Board of Governors of the Federal Reserve System, 20th and C VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 Streets NW, Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263–4869. FDIC: Benedetto Bosco, Chief, Capital Policy Section; 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. SUPPLEMENTARY INFORMATION: Table of Contents I. Background and Summary of Proposal II. Proposed Rule A. Revised Scope of an HVCRE Exposure B. Exclusions From an HVCRE Exposure 1. One- to Four-Family Residential Properties 2. Community Development Investment 3. Agricultural Land 4. Loans on Existing Income Producing Properties That Qualify as Permanent Financings 5. Certain Commercial Real Property Projects a. Contributed Capital b. ‘‘As Completed’’ Value Appraisal c. Project 6. Reclassification as a Non-HVCRE Exposure III. Regulatory Analyses A. Paperwork Reduction Act B. Regulatory Flexibility Act Analysis C. Plain Language D. OCC Unfunded Mandates Reform Act of 1995 Determination E. Riegle Community Development and Regulatory Improvement Act of 1994 I. Background and Summary of Proposal 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 1 The Board and OCC issued a joint final rule on October 11, 2013 (78 FR 62018) and the FDIC issued PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 48991 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 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 nonHVCRE 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 E:\FR\FM\28SEP1.SGM Continued 28SEP1 48992 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 the 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 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 incomeproducing 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 VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 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 (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/bcreg20 180706a1.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). PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 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. Question 1: The agencies invite comment as to whether the final rule should require reevaluation of ADC loans originated on or after January 1, 2015 under the revised HVCRE exposure definition. What are the advantages and disadvantages of requiring reevaluation? What alternative treatments, if any, should the agencies consider? 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 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. E:\FR\FM\28SEP1.SGM 28SEP1 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules the 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. amozie on DSK3GDR082PROD with PROPOSALS1 II. Proposed Rule 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. A. Revised Scope of an HVCRE Exposure 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 16 See supra fn. 6. 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). 17 See VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 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 incomeproducing 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 ‘‘incomeproducing 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. B. Exclusions From an HVCRE Exposure A loan secured by land or improved real property that meets the three criteria for the revised HVCRE exposure categorization may be excluded from a heightened risk weight if it meets one or more of the following statutory exclusions: 1. One- to Four-Family Residential Properties 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 PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 48993 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 fourfamily 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 oneto 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 oneto 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 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’’). E:\FR\FM\28SEP1.SGM 28SEP1 48994 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules loans are excluded. The agencies also invite comment on whether it is appropriate to include one- to fourfamily lot development loans within the scope of this exclusion. amozie on DSK3GDR082PROD with PROPOSALS1 2. Community Development Investment 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. 3. Agricultural Land 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 20 12 CFR part 24 (OCC); 12 CFR part 345 (FDIC); 12 CFR part 228 (Board). VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 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. 4. Loans on Existing Income-Producing Properties That Qualify as Permanent Financings 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. 5. Certain Commercial Real Property Projects 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-tovalue ratio is less than or equal to the 21 For the definition of loans secured by farmland, refer to the Call Report Instructions for Schedule RC–C, Part I, Item 1.b. PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 applicable supervisory maximum. Under the interagency real estate lending standards, maximum loan-tovalue 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. a. Contributed Capital Under section 214, cash, unencumbered readily marketable assets, paid development expenses outof-pocket, and contributed real property or improvements count as forms of capital for purposes of the capital contribution criteria. The proposal will incorporate these forms of capital into the revised definition of an HVCRE exposure. The agencies consider costs incurred by the project and paid by the borrower prior to the advance of funds by the banking organization as paid development expenses out-of-pocket. The statute 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). The proposal will incorporate this criterion into the revised definition of an HVCRE exposure. The agencies would reduce the value of the real property that counts towards the 15 percent contributed capital requirement by the aggregate amount of any liens on the real property securing the HVCRE exposure. 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 22 See E:\FR\FM\28SEP1.SGM supra fn. 17. 28SEP1 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 appropriate. 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. b. ‘‘As Completed’’ Value Appraisal 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 Question 8: The agencies invite comment on whether the proposed 23 83 FR 15019 (April 9, 2018). 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. 24 Section VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 interpretation on the required use of an as-completed value appraisal for purposes of the contributed capital exclusion is appropriate and clear and whether there are additional issues relating to the appraisal requirement for purposes of the contributed capital exclusion that need interpretation. c. Project 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. 6. Reclassification as a Non-HVCRE Exposure 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 10: The agencies invite comment on whether additional terms included in the text of section 214 of the statute that are not discussed above are ambiguous or need interpretation? The agencies invite comment on what, if any, operational challenges would banking organizations generally expect when determining whether an HVCRE exposure under the proposed revised definition can be reclassified as a nonHVCRE exposure? Question 11: The agencies invite comment on the potential advantages PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 48995 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? III. Regulatory Analyses A. Paperwork Reduction Act Certain provisions of the proposed rule contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501–3521). In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The OMB control number for the OCC is 1557– 0318, Board is 7100–0313, and FDIC is 3064–0153. These information collections 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. Comments are invited on: a. Whether the collections of information are necessary for the proper performance of the agencies’ functions, including whether the information has practical utility; b. The accuracy or the estimate of the burden of the information collections, including the validity of the methodology and assumptions used; c. Ways to enhance the quality, utility, and clarity of the information to be collected; d. Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and e. Estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information. 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 E:\FR\FM\28SEP1.SGM 28SEP1 48996 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules the 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. Information Collection Proposed To Be Revised Title of Information Collection: Recordkeeping and Disclosure Requirements Associated with Capital Adequacy. Frequency: Quarterly, annual. Affected Public: Businesses or other for-profit. Respondents: OCC: National banks and federal savings associations. Board: State member banks (SMBs), bank holding companies (BHCs), U.S. intermediate holding companies (IHCs), savings and loan holding companies (SLHCs), and global systemically important bank holding companies (G– SIBs). FDIC: State nonmember banks and state savings associations. 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. amozie on DSK3GDR082PROD with PROPOSALS1 PRA Burden Estimates OCC OMB control number: 1557–0318. Estimated number of respondents: 1,365 (of which 18 are advanced approaches institutions). Estimated average hours per response: Minimum Capital Ratios (1,365 institutions affected). VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 Recordkeeping (Ongoing)—16. Standardized Approach (1,365 institutions affected for ongoing). Recordkeeping (Initial setup)—122. Recordkeeping (Ongoing)—20. Disclosure (Initial setup)—226.25. Disclosure (Ongoing quarterly)— 131.25. Advanced Approach (18 institutions affected for ongiong). Recordkeeping (Initial setup)—460. Recordkeeping (Ongoing)—540.77. Recordkeeping (Ongoing quarterly)— 20. Disclosure (Initial setup)—280. Disclosure (Ongoing)—5.78. Disclosure (Ongoing quarterly)—35. Estimated annual burden hours: 1,088.25 hours initial setup, 64,929.42 hours for ongoing. Board Agency form number: FR Q. OMB control number: 7100–0313. Estimated number of respondents: 1,431 (of which 17 are advanced approaches institutions). Estimated average hours per response: Minimum Capital Ratios (1,431 institutions affected for ongoing). Recordkeeping (Ongoing)—16. Standardized Approach (1,431 institutions affected for ongoing). Recordkeeping (Initial setup)—122. Recordkeeping (Ongoing)—20. Disclosure (Initial setup)—226.25. Disclosure (Ongoing quarterly)— 131.25. Advanced Approach (17 institutions affected). Recordkeeping (Initial setup)—460. Recordkeeping (Ongoing)—540.77. Recordkeeping (Ongoing quarterly)— 20. Disclosure (Initial setup)—280. Disclosure (Ongoing)—5.78. Disclosure (Ongoing quarterly)—35. Disclosure (Table 13 quarterly)—5. Risk-based Capital Surcharge for GSIBs (21 institutions affected). Recordkeeping (Ongoing)—0.5. Estimated annual burden hours: 1,088 hours initial setup, 78,183 hours for ongoing. FDIC OMB control number: 3064–0153. Estimated number of respondents: 3,604 (of which 2 are advanced approaches institutions). Estimated average hours per response: Minimum Capital Ratios (3,604 institutions affected). Recordkeeping (Ongoing)—16. Standardized Approach (3,604 institutions affected for ongoing). Recordkeeping (Initial setup)—122. Recordkeeping (Ongoing)—20. Disclosure (Initial setup)—226.25. PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 Disclosure (Ongoing quarterly)— 131.25. Advanced Approach (2 institutions affected for ongoing). Recordkeeping (Initial setup)—460. Recordkeeping (Ongoing)—540.77. Recordkeeping (Ongoing quarterly)— 20. Disclosure (Initial setup)—280. Disclosure (Ongoing)—5.78. Disclosure (Ongoing quarterly)—35. Estimated annual burden hours: 1,088 hours initial setup, 131,802 hours for ongoing. The proposed rule will also require changes to the Call Reports (FFIEC 031, FFIEC 041, and FFIEC 051; OMB Nos. 1557–0081 (OCC), 7100–0036 (Board), and 3064–0052 (FDIC)) and Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101; OMB Nos. 1557–0239 (OCC), 7100–0319 (Board), and 3064–0159 (FDIC)), and Consolidated Financial Statements for Holding Companies (FR Y–9C; OMB No. 7100–0128), which will be addressed in separate Federal Register notices. B. Regulatory Flexibility Act Analysis OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), requires an agency, in connection with a proposed rule, to prepare an Initial Regulatory Flexibility Analysis describing the impact of the rule on small entities (defined by the SBA for purposes of the RFA to include commercial banks and savings institutions with total assets of $550 million or less and trust companies with total assets of $38.5 million of less) or to certify that the proposed rule would not have a significant economic impact on a substantial number of small entities. As of June 30, 2018, the OCC supervises 886 small entities.25 Currently, 211 small OCC-supervised institutions hold HVCRE loans and thus will be directly impacted by the proposed rule. Therefore, the proposed rule potentially affects a substantial number of small entities. However, the OCC does not find that the impact of this proposal would be economically significant. Therefore, the OCC certifies that the proposed rule would not have a significant economic impact on a 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. E:\FR\FM\28SEP1.SGM 28SEP1 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules substantial number of OCC-supervised small entities. Board: The RFA requires an agency to either provide an initial regulatory flexibility analysis with a proposal or certify that the proposal will not have a significant impact on a substantial number of small entities. Under regulations issued by the SBA, a small entity includes a bank, bank holding company, or savings and loan holding company with assets of $550 million or less (small banking organization).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 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). VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 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. The agencies anticipate updating the relevant reporting forms at a later date to the extent necessary to align with the capital rule. Given that the proposed rule does not impact the recordkeeping and reporting requirements that affected small banking organizations are currently subject to, there would be no change to the information that small banking organizations must track and report. The Board does not believe that the proposed rule duplicates, overlaps, or conflicts with any other Federal rules. In addition, there are no significant alternatives to the proposed rule. In light of the foregoing, the Board does not believe that the proposed rule, if adopted in final form, would have a significant economic impact on a substantial number of small entities. FDIC: The RFA generally requires that, in connection with a proposed rulemaking, an agency prepare and make available for public comment an initial regulatory flexibility analysis describing the impact of the proposed 27 See 12 CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225, appendix C; 12 CFR 238.9. PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 48997 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 FDICsupervised institutions, resulting in a modest reduction in their risk-based capital requirements. Assuming all HVCRE loans reported by small, FDICsupervised institutions were weighted at 100 percent and that covered institutions would maintain the same ratio of risk-based capital to riskweighted 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 28 5 U.S.C. 601 et seq. 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 mergeradjusted 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. 32 Id. 33 Id. 29 The E:\FR\FM\28SEP1.SGM 28SEP1 48998 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 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, FDICsupervised 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, FDICsupervised 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 FDICsupervised 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. Based on this supporting information, the FDIC does not believe that the rule will have a significant economic impact on a substantial number of small entities. The FDIC invites comments on all aspects of the supporting information provided in this RFA section. In 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. VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 particular, how long would it take for small institutions to review their HVCRE portfolios to identify loans that qualify for a lower risk weight? Also, would this rule have any significant effects on small entities that the FDIC has not identified? C. Plain Language Section 722 of the Gramm-LeachBliley 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: • Have the agencies organized the material to suit your needs? If not, how could they present the proposed rule more clearly? • Are the requirements in the proposed rule clearly stated? If not, how could the proposed rule be more clearly stated? • Do the regulations contain technical language or jargon that is not clear? If so, which language requires clarification? • Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes would achieve that? • Would more, but shorter, sections be better? If so, which sections should be changed? • What other changes can the agencies incorporate to make the regulation easier to understand? D. OCC Unfunded Mandates Reform Act of 1995 Determination The OCC analyzed the proposed rule under the factors set forth in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this analysis, the OCC considered whether the proposed rule includes a Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year (adjusted for inflation). The OCC has determined that this proposed rule would not result in expenditures by State, local, and Tribal governments, or the private sector, of $100 million or more in any one year. Accordingly, the OCC has not prepared a written statement to accompany this proposal. 36 Public Law 106–102, section 722, 113 Stat. 1338, 1471 (1999). PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 E. Riegle Community Development and Regulatory Improvement Act of 1994 Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act (RCDRIA),37 in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions, each Federal banking agency must consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations. In addition, section 302(b) of RCDRIA requires new regulations and amendments to regulations that impose additional reporting, disclosures, or other new requirements on insured depository institutions generally to take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form.38 The agencies note that comment on these matters has been solicited in other sections of this SUPPLEMENTARY INFORMATION section, and that the requirements of RCDRIA will be considered as part of the overall rulemaking process. In addition, the agencies also invite any other comments that further will inform the agencies’ consideration of RCDRIA. List of Subjects 12 CFR Part 3 Administrative practice and procedure, Banks, Banking, Capital adequacy, Capital requirements, Asset risk—weighting methodologies, Reporting and recordkeeping requirements, National banks, Federal savings associations, Risk. 12 CFR Part 217 Administrative practice and procedure, Banks, Banking, Capital adequacy, Capital requirements, Asset risk—weighting methodologies, Reporting and recordkeeping requirements, Holding companies, State member banks, Risk. 12 CFR Part 324 Administrative practice and procedure, Banks, Banking, Capital adequacy, Capital requirements, Asset risk—weighting methodologies, 37 12 U.S.C. 4802(a). 38 Id. E:\FR\FM\28SEP1.SGM 28SEP1 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules Reporting and recordkeeping requirements, State savings associations, State non-member banks, Risk. Office of the Comptroller of the Currency For the reasons set out in the joint preamble, the OCC proposes to amend 12 CFR part 3 as follows. PART 3—CAPITAL ADEQUACY STANDARDS 1. The authority citation for Part 3 continues to read as follows: ■ Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B). 2. Amend § 3.2 by revising the definition of a ‘‘high volatility commercial real estate (HVCRE) exposure’’ as follows: ■ § 3.2 Definitions. amozie on DSK3GDR082PROD with PROPOSALS1 * * * * * High volatility commercial real estate (HVCRE) exposure means: (1) A credit facility secured by land or improved real property that, prior to being reclassified by the depository institution as a non-HVCRE exposure pursuant to paragraph (6) of this definition— (i) Primarily finances, has financed, or refinances the acquisition, development, or construction of real property; (ii) Has the purpose of providing financing to acquire, develop, or improve such real property into incomeproducing real property; and (iii) Is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility; (2) Does not include a credit facility financing— (i) The acquisition, development, or construction of properties that are— (A) One- to four-family residential properties; (B) Real property that would qualify as an investment in community development; or (C) Agricultural land; (ii) The acquisition or refinance of existing income-producing real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the national bank’s or Federal savings association’s applicable loan underwriting criteria for permanent financings; (iii) Improvements to existing incomeproducing improved real property secured by a mortgage on such property, if the cash flow being generated by the VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 real property is sufficient to support the debt service and expenses of the real property, in accordance with the national bank’s or Federal savings association’s applicable loan underwriting criteria for permanent financings; or (iv) Commercial real property projects in which— (A) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio as determined by the OCC; (B) The borrower has contributed capital of at least 15 percent of the real property’s appraised, ‘as completed’ value to the project in the form of— (1) Cash; (2) Unencumbered readily marketable assets; (3) Paid development expenses out-ofpocket; or (4) Contributed real property or improvements; and (C) The borrower contributed the minimum amount of capital described under paragraph (2)(iv)(B) of this definition before the national bank or Federal savings association advances funds (other than the advance of a nominal sum made in order to secure the national bank’s or Federal savings association’s lien against the real property) under the credit facility, and such minimum amount of capital contributed by the borrower is contractually required to remain in the project until the HVCRE exposure has been reclassified by the national bank or Federal savings association as a nonHVCRE exposure under paragraph (6) of this definition; (3) Does not include any loan made prior to January 1, 2015; and (4) Does not include a credit facility reclassified as a non-HVCRE exposure under paragraph (6) of this definition. (5) Value Of Contributed Real Property.—For the purposes of this HVCRE exposure definition, the value of any real property contributed by a borrower as a capital contribution shall be the appraised value of the property as determined under standards prescribed pursuant to section 1110 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3339), in connection with the extension of the credit facility or loan to such borrower. (6) Reclassification As A Non-HVCRE exposure.—For purposes of this HVCRE 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 nonHVCRE exposure upon— PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 48999 (i) The substantial completion of the development or construction of the real property being financed by the credit facility; and (ii) Cash flow being generated by the real property being sufficient to support the debt service and expenses of the real property, in accordance with the national bank’s or Federal savings association’s applicable loan underwriting criteria for permanent financings. * * * * * Board of Governors of the Federal Reserve System For the reasons set out in the joint preamble, part 217 of chapter II of title 12 of the Code of Federal Regulations is proposed to be amended as follows: PART 217—CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q) * * * * * Subpart A—General Provisions 3. The authority citation for part 217 continues to read as follows: ■ Authority: 12 U.S.C. 248(a), 321–338a, 481–486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, 3904, 3906–3909,4808, 5365, 5368, 5371. 4. Section 217.2 is amended by revising the definition of a ‘‘high volatility commercial real estate (HVCRE) exposure’’ as follows: ■ § 217.2 Definitions. * * * * * High volatility commercial real estate (HVCRE) exposure means: (1) A credit facility secured by land or improved real property that, prior to being reclassified by the Boardregulated 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 incomeproducing real property; and (iii) Is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility; provided that: (2) An HVCRE exposure does not include a credit facility financing— (i) The acquisition, development, or construction of properties that are— (A) One- to four-family residential properties; E:\FR\FM\28SEP1.SGM 28SEP1 amozie on DSK3GDR082PROD with PROPOSALS1 49000 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules (B) Real property that would qualify as an investment in community development; or (C) Agricultural land; (ii) The acquisition or refinance of existing income-producing real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the Boardregulated institution’s applicable loan underwriting criteria for permanent financings; (iii) Improvements to existing incomeproducing 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 Boardregulated institution’s applicable loan underwriting criteria for permanent financings; or (iv) Commercial real property projects in which— (A) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio as determined by the Board; (B) The borrower has contributed capital of at least 15 percent of the real property’s appraised, ‘as completed’ value to the project in the form of— (1) Cash; (2) Unencumbered readily marketable assets; (3) Paid development expenses out-ofpocket; or (4) Contributed real property or improvements; and (C) The borrower contributed the minimum amount of capital described under paragraph (2)(iv)(B) of this definition before the Board-regulated institution advances funds (other than the advance of a nominal sum made in order to secure the Board-regulated institution’s lien against the real property) under the credit facility, and such minimum amount of capital contributed by the borrower is contractually required to remain in the project until the HVCRE exposure has been reclassified by the Board-regulated institution as a non-HVCRE exposure under paragraph (6) of this definition; (3) An HVCRE exposure does not include any loan made prior to January 1, 2015; (4) An HVCRE exposure does not include a credit facility reclassified as a non-HVCRE exposure under paragraph (6). (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 VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 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 Boardregulated institution, an Board-regulated institution may reclassify an HVCRE exposure as a non-HVCRE exposure upon— (i) The substantial completion of the development or construction of the real property being financed by the credit facility; and (ii) Cash flow being generated by the real property being sufficient to support the debt service and expenses of the real property, in accordance with the Boardregulated institution’s applicable loan underwriting criteria for permanent financings. * * * * * 12 CFR Part 324 Federal Deposit Insurance Corporation For the reasons set out in the joint preamble, the FDIC proposes to amend 12 CFR part 324 as follows. PART 324—CAPITAL ADEQUACY OF FDIC--SUPERVISED INSTITUTIONS Subpart A—General Provisions 5. The authority citation for part 324 continues to read as follows: ■ Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102–233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102–242, 105 Stat. 2236, 2355, as amended by Pub. L. 103–325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102–242, 105 Stat. 2236, 2386, as amended by Pub. L. 102–550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note); Pub. L. 111–203, 124 Stat. 1376, 1887 (15 U.S.C. 78o–7 note). 6. Section 324.2 is amended by revising the definition of a ‘‘high volatility commercial real estate (HVCRE) exposure’’ as follows: ■ § 324.2 Definitions. * * * * * High volatility commercial real estate (HVCRE) exposure means: (1) A credit facility secured by land or improved real property that, prior to being reclassified by the FDICsupervised institution as a non-HVCRE exposure pursuant to paragraph (6) of this definition — PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 (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 incomeproducing real property; and (iii) Is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility; provided that: (2) An HVCRE exposure does not include a credit facility financing— (i) The acquisition, development, or construction of properties that are— (A) One- to four-family residential properties; (B) Real property that would qualify as an investment in community development; or (C) Agricultural land; (ii) The acquisition or refinance of existing income-producing real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the FDICsupervised institution’s applicable loan underwriting criteria for permanent financings; (iii) Improvements to existing incomeproducing 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 FDICsupervised institution’s applicable loan underwriting criteria for permanent financings; or (iv) Commercial real property projects in which— (A) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio as determined by the FDIC; (B) The borrower has contributed capital of at least 15 percent of the real property’s appraised, ‘as completed’ value to the project in the form of— (1) Cash; (2) Unencumbered readily marketable assets; (3) Paid development expenses out-ofpocket; or (4) Contributed real property or improvements; and (C) The borrower contributed the minimum amount of capital described under paragraph (2)(iv)(B) of this definition before the FDIC-supervised institution advances funds (other than the advance of a nominal sum made in order to secure the FDIC-supervised institution’s lien against the real property) under the credit facility, and such minimum amount of capital contributed by the borrower is E:\FR\FM\28SEP1.SGM 28SEP1 Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 contractually required to remain in the project until the HVCRE exposure has been reclassified by the FDICsupervised institution as a non-HVCRE exposure under paragraph (6) of this definition; (3) An HVCRE exposure does not include any loan made prior to January 1, 2015; (4) An HVCRE exposure does not include a credit facility reclassified as a non-HVCRE exposure under paragraph (6). (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 FDICsupervised institution, an FDICsupervised 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 FDICsupervised institution’s applicable loan underwriting criteria for permanent financings. * * * * * Dated: September 11, 2018. Joseph M. Otting, Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System, September 18, 2018. Ann E. Misback, Secretary of the Board. Dated at Washington, DC, on September 12, 2018. By order of the Board of Directors. Federal Deposit Insurance Corporation. Robert E. Feldman, Executive Secretary. [FR Doc. 2018–20875 Filed 9–27–18; 8:45 am] BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P VerDate Sep<11>2014 17:53 Sep 27, 2018 Jkt 244001 SMALL BUSINESS ADMINISTRATION 13 CFR Parts 103, 120 and 121 RIN 3245–AG74 Express Loan Programs; Affiliation Standards U.S. Small Business Administration. ACTION: Proposed rule. AGENCY: The U.S. Small Business Administration (SBA or Agency) is proposing to amend various regulations governing its business loan programs, including the SBA Express and Export Express Loan Programs and the Microloan and Development Company (504) loan programs. DATES: SBA must receive comments to the proposed rule on or before November 27, 2018. ADDRESSES: You may submit comments, identified by RIN: 3245–AG74, by any of the following methods: • Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. • Mail: Kimberly Chuday or Thomas Heou, Office of Financial Assistance, Office of Capital Access, Small Business Administration, 409 Third Street SW, Washington, DC 20416. • Hand Delivery/Courier: Kimberly Chuday or Thomas Heou, Office of Financial Assistance, Office of Capital Access, Small Business Administration, 409 Third Street SW, Washington, DC 20416. SBA will post all comments on www.regulations.gov. If you wish to submit confidential business information (CBI) as defined in the User Notice at www.regulations.gov, please submit the information to Kimberly Chuday or Thomas Heou, Office of Financial Assistance, Office of Capital Access, 409 Third Street SW, Washington, DC 20416. Highlight the information that you consider to be CBI and explain why you believe SBA should hold this information as confidential. SBA will review the information and make the final determination whether it will publish the information. FOR FURTHER INFORMATION CONTACT: Robert Carpenter, Acting Chief, 7(a) Program and Policy Branch, Office of Financial Assistance, Office of Capital Access, Small Business Administration, 409 Third Street SW, Washington, DC 20416; telephone: (202) 205–7654; email://robert.carpenter@sba.gov. SUPPLEMENTARY INFORMATION: SUMMARY: PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 49001 I. Background Information The SBA Express Loan Program (SBA Express) is established in section 7(a)(31) of the Small Business Act (the Act) (15 U.S.C. 636(a)(31)). Under SBA Express, designated Lenders (SBA Express Lenders) are permitted to use, to the maximum extent practicable, their own analyses, procedures, and documentation in making, closing, servicing, and liquidating SBA Express loans. They also have reduced requirements for submitting documentation to SBA and obtaining the Agency’s prior approval. These loan analyses, procedures, and documentation must meet prudent lending standards; be consistent with those the Lenders use for their similarlysized, non-SBA guaranteed commercial loans; and conform to all requirements imposed upon Lenders generally and SBA Express Lenders in particular by Loan Program Requirements (as defined in 13 CFR 120.10), as such requirements are issued and revised by SBA from time to time, unless specifically identified by SBA as inapplicable to SBA Express loans. In exchange for the increased authority and autonomy provided under the SBA Express Program, SBA Express Lenders agree to accept a maximum guaranty of 50 percent. The Export Express Loan Program (Export Express) is established in section 7(a)(34) of the Act (15 U.S.C. 636(a)(34)). This program is designed to help SBA meet the export financing needs of small businesses. Although it is a separate program, Export Express is generally subject to the same loan processing, making, closing, servicing, and liquidation requirements as well as the same interest rates and applicable fees as SBA Express. However, Export Express loans have a higher maximum loan amount than is available under SBA Express, and a maximum guaranty percentage of 75 or 90 percent, depending on the amount of the Export Express loan. A. Proposed Amendments This proposed rule would: 1. Incorporate into the regulations governing the 7(a) Loan Program the requirements specifically applicable to the SBA Express and Export Express Loan Programs in order to provide additional clarity for SBA Express and Export Express Lenders; 2. Add a new regulation to require certain owners of the small business Applicant to inject excess liquid assets into the business to reduce the amount of SBA-guaranteed funds that otherwise would be needed; E:\FR\FM\28SEP1.SGM 28SEP1

Agencies

[Federal Register Volume 83, Number 189 (Friday, September 28, 2018)]
[Proposed Rules]
[Pages 48990-49001]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20875]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 83, No. 189 / Friday, September 28, 2018 / 
Proposed Rules

[[Page 48990]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket ID OCC-2018-0026]
RIN 1557-AE48

FEDERAL RESERVE SYSTEM

12 CFR Part 217

[Regulation Q; Docket No. R-1621]
RIN 7100--AF15

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 324

RIN 3064--AE90


Regulatory Capital Treatment for High Volatility Commercial Real 
Estate (HVCRE) Exposures

AGENCY: Office of the Comptroller of the Currency, Treasury; the Board 
of Governors of the Federal Reserve System; and the Federal Deposit 
Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: The Office of the Comptroller of the Currency, the Board of 
Governors of the Federal Reserve System, and the Federal Deposit 
Insurance Corporation (collectively, the agencies) are proposing to 
amend the regulatory capital rule to revise the definition of ``high 
volatility commercial real estate (HVCRE) exposure'' to conform to the 
statutory definition of ``high volatility commercial real estate 
acquisition, development, orconstruction (HVCRE ADC) loan,'' in 
accordance with section 214 of the Economic Growth, Regulatory Relief, 
and Consumer Protection Act (EGRRCPA). Additionally, to facilitate the 
consistent application of the revised HVCRE exposure definition, the 
agencies propose to interpret certain terms in the revised HVCRE 
exposure definition generally consistent with their usage in other 
relevant regulations or the instructions to the Consolidated Reports of 
Condition and Income (Call Report), where applicable, and request 
comment on whether any other terms in the revised definition would also 
require interpretation.

DATES: Comments must be received by November 27, 2018.

ADDRESSES: 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.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
     Email: [email protected].
     Mail: Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E-
218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218, 
Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2018-0026'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish them on the 
Regulations.gov website without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not include any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to 
www.regulations.gov. Enter ``Docket ID OCC-2018-0026'' in the Search 
box and click ``Search.'' Click on ``Open Docket Folder'' on the right 
side of the screen and then ``Comments.'' Comments can be filtered by 
clicking on ``View All'' and then using the filtering tools on the left 
side of the screen.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov. Supporting materials may 
be viewed by clicking on ``Open Docket Folder'' and then clicking on 
``Supporting Documents.'' The docket may be viewed after the close of 
the comment period in the same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect 
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For 
security reasons, the OCC requires that visitors make an appointment to 
inspect comments. You may do so by calling (202) 649-6700 or, for 
persons who are hearing impaired, TTY, (202) 649-5597. Upon arrival, 
visitors will be required to present valid government-issued photo 
identification and submit to security screening in order to inspect 
comments.
    Board: You may submit comments, identified by Docket No. R-1621; 
RIN 7100-AF-15, by any of the following methods:
     Agency website: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
number and RIN in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551. All public comments will be made available on the 
Board's website at https://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

[[Page 48991]]

any 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.
    FDIC: You may submit comments, identified by RIN 3064-AE90, by any 
of the following methods:
     Agency website: https://www.FDIC.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on 
the Agency website.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW, Washington, DC 20429.
     Hand Delivered/Courier: Comments may be hand-delivered to 
the guard station at the rear of the 550 17th Street Building (located 
on F Street) on business days between 7:00 a.m. and 5:00 p.m.
     Email: [email protected]. Include RIN 3064-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 https://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.

FOR FURTHER INFORMATION CONTACT: 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.
    Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Elizabeth MacDonald, Manager, (202) 475-6216; Andrew Willis, 
Senior Supervisory Financial Analyst, (202) 912-4323; Matthew 
McQueeney, Supervisory Financial Analyst (202) 452-2942; Sean Healey, 
Supervisory Financial Analyst, (202) 912-4611, Division of Supervision 
and Regulation; or Benjamin McDonough, Assistant General Counsel (202) 
452-2036; David Alexander, Counsel, (202) 452-2877; Mary Watkins, 
Attorney (202) 452-3722, Legal Division, Board of Governors of the 
Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. 
For the hearing impaired only, Telecommunication Device for the Deaf 
(TDD), (202) 263-4869.
    FDIC: Benedetto Bosco, Chief, Capital Policy Section; 
[email protected]; David Riley, Senior Policy Analyst, Capital Policy 
Section; [email protected]; Stephanie Lorek, Senior Policy Analyst, 
[email protected]; Michael Maloney, Senior Policy Analyst, 
[email protected]; [email protected]; Capital Markets Branch, 
Division of Risk Management Supervision, (202) 898-6888; Beverlea S. 
Gardner, Senior Examination Specialist, [email protected], Policy and 
Program Development; Michael Phillips, Acting Supervisory Counsel, 
[email protected]; Catherine Wood, Counsel, [email protected]; or 
Alexander Bonander, Attorney, [email protected]; Supervision and 
Legislation Branch, Legal Division, Federal Deposit Insurance 
Corporation, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background and Summary of Proposal
II. Proposed Rule
    A. Revised Scope of an HVCRE Exposure
    B. Exclusions From an HVCRE Exposure
    1. One- to Four-Family Residential Properties
    2. Community Development Investment
    3. Agricultural Land
    4. Loans on Existing Income Producing Properties That Qualify as 
Permanent Financings
    5. Certain Commercial Real Property Projects
    a. Contributed Capital
    b. ``As Completed'' Value Appraisal
    c. Project
    6. Reclassification as a Non-HVCRE Exposure
III. Regulatory Analyses
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act Analysis
    C. Plain Language
    D. OCC Unfunded Mandates Reform Act of 1995 Determination
    E. Riegle Community Development and Regulatory Improvement Act 
of 1994

I. Background and Summary of Proposal

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    On May 24, 2018, EGRRCPA became law. Section 214 of EGRRCPA \5\ 
amends

[[Page 48992]]

the 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \15\ On January 1, 2015, the heightened risk weight for HVCRE 
exposures became effective for all banking organizations.
---------------------------------------------------------------------------

    Question 1: The agencies invite comment as to whether the final 
rule should require reevaluation of ADC loans originated on or after 
January 1, 2015 under the revised HVCRE exposure definition. What are 
the advantages and disadvantages of requiring reevaluation? What 
alternative treatments, if any, should the agencies consider?
    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

[[Page 48993]]

the 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.

II. Proposed Rule

    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.

A. Revised Scope of an HVCRE Exposure

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.

B. Exclusions From an HVCRE Exposure

    A loan secured by land or improved real property that meets the 
three criteria for the revised HVCRE exposure categorization may be 
excluded from a heightened risk weight if it meets one or more of the 
following statutory exclusions:
1. One- to Four-Family Residential Properties
    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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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

[[Page 48994]]

loans 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.
2. Community Development Investment
    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.
---------------------------------------------------------------------------

    \20\ 12 CFR part 24 (OCC); 12 CFR part 345 (FDIC); 12 CFR part 
228 (Board).
---------------------------------------------------------------------------

    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.
3. Agricultural Land
    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\
---------------------------------------------------------------------------

    \21\ For the definition of loans secured by farmland, refer to 
the Call Report Instructions for Schedule RC-C, Part I, Item 1.b.
---------------------------------------------------------------------------

    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.
4. Loans on Existing Income-Producing Properties That Qualify as 
Permanent Financings
    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.
5. Certain Commercial Real Property Projects
    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.
---------------------------------------------------------------------------

    \22\ See supra fn. 17.
---------------------------------------------------------------------------

a. Contributed Capital
    Under section 214, cash, unencumbered readily marketable assets, 
paid development expenses out-of-pocket, and contributed real property 
or improvements count as forms of capital for purposes of the capital 
contribution criteria. The proposal will incorporate these forms of 
capital into the revised definition of an HVCRE exposure. The agencies 
consider costs incurred by the project and paid by the borrower prior 
to the advance of funds by the banking organization as paid development 
expenses out-of-pocket.
    The statute 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). The proposal will incorporate this criterion into the revised 
definition of an HVCRE exposure. The agencies would reduce the value of 
the real property that counts towards the 15 percent contributed 
capital requirement by the aggregate amount of any liens on the real 
property securing the HVCRE exposure.
    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

[[Page 48995]]

appropriate. 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.
b. ``As Completed'' Value Appraisal
    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Question 8: The agencies invite comment on whether the proposed 
interpretation on the required use of an as-completed value appraisal 
for purposes of the contributed capital exclusion is appropriate and 
clear and whether there are additional issues relating to the appraisal 
requirement for purposes of the contributed capital exclusion that need 
interpretation.
c. Project
    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.
6. Reclassification as a Non-HVCRE Exposure
    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 10: The agencies invite comment on whether additional 
terms included in the text of section 214 of the statute that are not 
discussed above are ambiguous or need interpretation? The agencies 
invite comment on what, if any, operational challenges would banking 
organizations generally expect when determining whether an HVCRE 
exposure under the proposed revised definition can be reclassified as a 
non-HVCRE exposure?
    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?

III. Regulatory Analyses

A. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with 
the requirements of the PRA, the agencies may not conduct or sponsor, 
and the respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The OMB control number for the OCC is 
1557-0318, Board is 7100-0313, and FDIC is 3064-0153. These information 
collections 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.
    Comments are invited on:
    a. Whether the collections of information are necessary for the 
proper performance of the agencies' functions, including whether the 
information has practical utility;
    b. The accuracy or the estimate of the burden of the information 
collections, including the validity of the methodology and assumptions 
used;
    c. Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    d. Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    e. Estimates of capital or startup costs and costs of operation, 
maintenance, and purchase of services to provide information.
    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

[[Page 48996]]

the 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 
[email protected], Attention, Federal Banking Agencies Desk 
Officer.
Information Collection Proposed To Be Revised
    Title of Information Collection: Recordkeeping and Disclosure 
Requirements Associated with Capital Adequacy.
    Frequency: Quarterly, annual.
    Affected Public: Businesses or other for-profit.
    Respondents:
    OCC: National banks and federal savings associations.
    Board: State member banks (SMBs), bank holding companies (BHCs), 
U.S. intermediate holding companies (IHCs), savings and loan holding 
companies (SLHCs), and global systemically important bank holding 
companies (G-SIBs).
    FDIC: State nonmember banks and state savings associations.
    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.
PRA Burden Estimates
OCC
    OMB control number: 1557-0318.
    Estimated number of respondents: 1,365 (of which 18 are advanced 
approaches institutions).
    Estimated average hours per response:
    Minimum Capital Ratios (1,365 institutions affected).
    Recordkeeping (Ongoing)--16.
    Standardized Approach (1,365 institutions affected for ongoing).
    Recordkeeping (Initial setup)--122.
    Recordkeeping (Ongoing)--20.
    Disclosure (Initial setup)--226.25.
    Disclosure (Ongoing quarterly)--131.25.
    Advanced Approach (18 institutions affected for ongiong).
    Recordkeeping (Initial setup)--460.
    Recordkeeping (Ongoing)--540.77.
    Recordkeeping (Ongoing quarterly)--20.
    Disclosure (Initial setup)--280.
    Disclosure (Ongoing)--5.78.
    Disclosure (Ongoing quarterly)--35.
    Estimated annual burden hours: 1,088.25 hours initial setup, 
64,929.42 hours for ongoing.
Board
    Agency form number: FR Q.
    OMB control number: 7100-0313.
    Estimated number of respondents: 1,431 (of which 17 are advanced 
approaches institutions).
    Estimated average hours per response:
    Minimum Capital Ratios (1,431 institutions affected for ongoing).
    Recordkeeping (Ongoing)--16.
    Standardized Approach (1,431 institutions affected for ongoing).
    Recordkeeping (Initial setup)--122.
    Recordkeeping (Ongoing)--20.
    Disclosure (Initial setup)--226.25.
    Disclosure (Ongoing quarterly)--131.25.
    Advanced Approach (17 institutions affected).
    Recordkeeping (Initial setup)--460.
    Recordkeeping (Ongoing)--540.77.
    Recordkeeping (Ongoing quarterly)--20.
    Disclosure (Initial setup)--280.
    Disclosure (Ongoing)--5.78.
    Disclosure (Ongoing quarterly)--35.
    Disclosure (Table 13 quarterly)--5.
    Risk-based Capital Surcharge for GSIBs (21 institutions affected).
    Recordkeeping (Ongoing)--0.5.
    Estimated annual burden hours: 1,088 hours initial setup, 78,183 
hours for ongoing.
FDIC
    OMB control number: 3064-0153.
    Estimated number of respondents: 3,604 (of which 2 are advanced 
approaches institutions).
    Estimated average hours per response:
    Minimum Capital Ratios (3,604 institutions affected).
    Recordkeeping (Ongoing)--16.
    Standardized Approach (3,604 institutions affected for ongoing).
    Recordkeeping (Initial setup)--122.
    Recordkeeping (Ongoing)--20.
    Disclosure (Initial setup)--226.25.
    Disclosure (Ongoing quarterly)--131.25.
    Advanced Approach (2 institutions affected for ongoing).
    Recordkeeping (Initial setup)--460.
    Recordkeeping (Ongoing)--540.77.
    Recordkeeping (Ongoing quarterly)--20.
    Disclosure (Initial setup)--280.
    Disclosure (Ongoing)--5.78.
    Disclosure (Ongoing quarterly)--35.
    Estimated annual burden hours: 1,088 hours initial setup, 131,802 
hours for ongoing.
    The proposed rule will also require changes to the Call Reports 
(FFIEC 031, FFIEC 041, and FFIEC 051; OMB Nos. 1557-0081 (OCC), 7100-
0036 (Board), and 3064-0052 (FDIC)) and Risk-Based Capital Reporting 
for Institutions Subject to the Advanced Capital Adequacy Framework 
(FFIEC 101; OMB Nos. 1557-0239 (OCC), 7100-0319 (Board), and 3064-0159 
(FDIC)), and Consolidated Financial Statements for Holding Companies 
(FR Y-9C; OMB No. 7100-0128), which will be addressed in separate 
Federal Register notices.

B. Regulatory Flexibility Act Analysis

    OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), 
requires an agency, in connection with a proposed rule, to prepare an 
Initial Regulatory Flexibility Analysis describing the impact of the 
rule on small entities (defined by the SBA for purposes of the RFA to 
include commercial banks and savings institutions with total assets of 
$550 million or less and trust companies with total assets of $38.5 
million of less) or to certify that the proposed rule would not have a 
significant economic impact on a substantial number of small entities.
    As of June 30, 2018, the OCC supervises 886 small entities.\25\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Currently, 211 small OCC-supervised institutions hold HVCRE loans 
and thus will be directly impacted by the proposed rule. Therefore, the 
proposed rule potentially affects a substantial number of small 
entities. However, the OCC does not find that the impact of this 
proposal would be economically significant.
    Therefore, the OCC certifies that the proposed rule would not have 
a significant economic impact on a

[[Page 48997]]

substantial number of OCC-supervised small entities.
    Board: The RFA requires an agency to either provide an initial 
regulatory flexibility analysis with a proposal or certify that the 
proposal will not have a significant impact on a substantial number of 
small entities. Under regulations issued by the SBA, a small entity 
includes a bank, bank holding company, or savings and loan holding 
company with assets of $550 million or less (small banking 
organization).\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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \27\ See 12 CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225, 
appendix C; 12 CFR 238.9.
---------------------------------------------------------------------------

    The agencies anticipate updating the relevant reporting forms at a 
later date to the extent necessary to align with the capital rule. 
Given that the proposed rule does not impact the recordkeeping and 
reporting requirements that affected small banking organizations are 
currently subject to, there would be no change to the information that 
small banking organizations must track and report.
    The Board does not believe that the proposed rule duplicates, 
overlaps, or conflicts with any other Federal rules. In addition, there 
are no significant alternatives to the proposed rule. In light of the 
foregoing, the Board does not believe that the proposed rule, if 
adopted in final form, would have a significant economic impact on a 
substantial number of small entities.
    FDIC: The RFA generally requires that, in connection with a 
proposed rulemaking, an agency prepare and make available for public 
comment an initial regulatory flexibility analysis describing the 
impact of the proposed rule on small entities.\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.
---------------------------------------------------------------------------

    \28\ 5 U.S.C. 601 et seq.
    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \30\ FDIC-supervised institutions are set forth in 12 U.S.C. 
1813(q)(2).
    \31\ FDIC Call Report, March 31st, 2018.
    \32\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \33\ Id.

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

[[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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
    Based on this supporting information, the FDIC does not believe 
that the rule will have a significant economic impact on a substantial 
number of small entities.
    The FDIC invites comments on all aspects of the supporting 
information provided in this RFA section. In particular, how long would 
it take for small institutions to review their HVCRE portfolios to 
identify loans that qualify for a lower risk weight? Also, would this 
rule have any significant effects on small entities that the FDIC has 
not identified?

C. Plain Language

    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:
---------------------------------------------------------------------------

    \36\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
---------------------------------------------------------------------------

     Have the agencies organized the material to suit your 
needs? If not, how could they present the proposed rule more clearly?
     Are the requirements in the proposed rule clearly stated? 
If not, how could the proposed rule be more clearly stated?
     Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes would achieve that?
     Would more, but shorter, sections be better? If so, which 
sections should be changed?
     What other changes can the agencies incorporate to make 
the regulation easier to understand?

D. OCC Unfunded Mandates Reform Act of 1995 Determination

    The OCC analyzed the proposed rule under the factors set forth in 
the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under 
this analysis, the OCC considered whether the proposed rule includes a 
Federal mandate that may result in the expenditure by State, local, and 
Tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year (adjusted for inflation). The OCC has 
determined that this proposed rule would not result in expenditures by 
State, local, and Tribal governments, or the private sector, of $100 
million or more in any one year. Accordingly, the OCC has not prepared 
a written statement to accompany this proposal.

E. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\37\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
insured depository institutions, each Federal banking agency must 
consider, consistent with principles of safety and soundness and the 
public interest, any administrative burdens that such regulations would 
place on depository institutions, including small depository 
institutions, and customers of depository institutions, as well as the 
benefits of such regulations. In addition, section 302(b) of RCDRIA 
requires new regulations and amendments to regulations that impose 
additional reporting, disclosures, or other new requirements on insured 
depository institutions generally to take effect on the first day of a 
calendar quarter that begins on or after the date on which the 
regulations are published in final form.\38\
---------------------------------------------------------------------------

    \37\ 12 U.S.C. 4802(a).
    \38\ Id.
---------------------------------------------------------------------------

    The agencies note that comment on these matters has been solicited 
in other sections of this Supplementary Information section, and that 
the requirements of RCDRIA will be considered as part of the overall 
rulemaking process. In addition, the agencies also invite any other 
comments that further will inform the agencies' consideration of 
RCDRIA.

List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Banks, Banking, Capital 
adequacy, Capital requirements, Asset risk--weighting methodologies, 
Reporting and recordkeeping requirements, National banks, Federal 
savings associations, Risk.

12 CFR Part 217

    Administrative practice and procedure, Banks, Banking, Capital 
adequacy, Capital requirements, Asset risk--weighting methodologies, 
Reporting and recordkeeping requirements, Holding companies, State 
member banks, Risk.

12 CFR Part 324

    Administrative practice and procedure, Banks, Banking, Capital 
adequacy, Capital requirements, Asset risk--weighting methodologies,

[[Page 48999]]

Reporting and recordkeeping requirements, State savings associations, 
State non-member banks, Risk.

Office of the Comptroller of the Currency

    For the reasons set out in the joint preamble, the OCC proposes to 
amend 12 CFR part 3 as follows.

PART 3--CAPITAL ADEQUACY STANDARDS

0
1. The authority citation for Part 3 continues to read as follows:

    Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).

0
2. Amend Sec.  3.2 by revising the definition of a ``high volatility 
commercial real estate (HVCRE) exposure'' as follows:


Sec.  3.2  Definitions.

* * * * *
    High volatility commercial real estate (HVCRE) exposure means:
    (1) A credit facility secured by land or improved real property 
that, prior to being reclassified by the depository institution as a 
non-HVCRE exposure pursuant to paragraph (6) of this definition--
    (i) Primarily finances, has financed, or refinances the 
acquisition, development, or construction of real property;
    (ii) Has the purpose of providing financing to acquire, develop, or 
improve such real property into income-producing real property; and
    (iii) Is dependent upon future income or sales proceeds from, or 
refinancing of, such real property for the repayment of such credit 
facility;
    (2) Does not include a credit facility financing--
    (i) The acquisition, development, or construction of properties 
that are--
    (A) One- to four-family residential properties;
    (B) Real property that would qualify as an investment in community 
development; or
    (C) Agricultural land;
    (ii) The acquisition or refinance of existing income-producing real 
property secured by a mortgage on such property, if the cash flow being 
generated by the real property is sufficient to support the debt 
service and expenses of the real property, in accordance with the 
national bank's or Federal savings association's applicable loan 
underwriting criteria for permanent financings;
    (iii) Improvements to existing income-producing improved real 
property secured by a mortgage on such property, if the cash flow being 
generated by the real property is sufficient to support the debt 
service and expenses of the real property, in accordance with the 
national bank's or Federal savings association's applicable loan 
underwriting criteria for permanent financings; or
    (iv) Commercial real property projects in which--
    (A) The loan-to-value ratio is less than or equal to the applicable 
maximum supervisory loan-to-value ratio as determined by the OCC;
    (B) The borrower has contributed capital of at least 15 percent of 
the real property's appraised, `as completed' value to the project in 
the form of--
    (1) Cash;
    (2) Unencumbered readily marketable assets;
    (3) Paid development expenses out-of-pocket; or
    (4) Contributed real property or improvements; and
    (C) The borrower contributed the minimum amount of capital 
described under paragraph (2)(iv)(B) of this definition before the 
national bank or Federal savings association advances funds (other than 
the advance of a nominal sum made in order to secure the national 
bank's or Federal savings association's lien against the real property) 
under the credit facility, and such minimum amount of capital 
contributed by the borrower is contractually required to remain in the 
project until the HVCRE exposure has been reclassified by the national 
bank or Federal savings association as a non-HVCRE exposure under 
paragraph (6) of this definition;
    (3) Does not include any loan made prior to January 1, 2015; and
    (4) Does not include a credit facility reclassified as a non-HVCRE 
exposure under paragraph (6) of this definition.
    (5) Value Of Contributed Real Property.--For the purposes of this 
HVCRE exposure definition, the value of any real property contributed 
by a borrower as a capital contribution shall be the appraised value of 
the property as determined under standards prescribed pursuant to 
section 1110 of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (12 U.S.C. 3339), in connection with the 
extension of the credit facility or loan to such borrower.
    (6) Reclassification As A Non-HVCRE exposure.--For purposes of this 
HVCRE exposure definition and with respect to a credit facility and a 
national bank or Federal savings association, a national bank or 
Federal savings association may reclassify an HVCRE exposure as a non-
HVCRE exposure upon--
    (i) The substantial completion of the development or construction 
of the real property being financed by the credit facility; and
    (ii) Cash flow being generated by the real property being 
sufficient to support the debt service and expenses of the real 
property, in accordance with the national bank's or Federal savings 
association's applicable loan underwriting criteria for permanent 
financings.
* * * * *

Board of Governors of the Federal Reserve System

    For the reasons set out in the joint preamble, part 217 of chapter 
II of title 12 of the Code of Federal Regulations is proposed to be 
amended as follows:

PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND 
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)

* * * * *

Subpart A--General Provisions

0
3. The authority citation for part 217 continues to read as follows:

    Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 
3906-3909,4808, 5365, 5368, 5371.

0
4. Section 217.2 is amended by revising the definition of a ``high 
volatility commercial real estate (HVCRE) exposure'' as follows:


Sec.  217.2  Definitions.

* * * * *
    High volatility commercial real estate (HVCRE) exposure means:
    (1) A credit facility secured by land or improved real property 
that, prior to being reclassified by the Board-regulated institution as 
a non-HVCRE exposure pursuant to paragraph (6) of this definition--
    (i) Primarily finances, has financed, or refinances the 
acquisition, development, or construction of real property;
    (ii) Has the purpose of providing financing to acquire, develop, or 
improve such real property into income-producing real property; and
    (iii) Is dependent upon future income or sales proceeds from, or 
refinancing of, such real property for the repayment of such credit 
facility; provided that:
    (2) An HVCRE exposure does not include a credit facility 
financing--
    (i) The acquisition, development, or construction of properties 
that are--
    (A) One- to four-family residential properties;

[[Page 49000]]

    (B) Real property that would qualify as an investment in community 
development; or
    (C) Agricultural land;
    (ii) The acquisition or refinance of existing income-producing real 
property secured by a mortgage on such property, if the cash flow being 
generated by the real property is sufficient to support the debt 
service and expenses of the real property, in accordance with the 
Board-regulated institution's applicable loan underwriting criteria for 
permanent financings;
    (iii) Improvements to existing income-producing improved real 
property secured by a mortgage on such property, if the cash flow being 
generated by the real property is sufficient to support the debt 
service and expenses of the real property, in accordance with the 
Board-regulated institution's applicable loan underwriting criteria for 
permanent financings; or
    (iv) Commercial real property projects in which--
    (A) The loan-to-value ratio is less than or equal to the applicable 
maximum supervisory loan-to-value ratio as determined by the Board;
    (B) The borrower has contributed capital of at least 15 percent of 
the real property's appraised, `as completed' value to the project in 
the form of--
    (1) Cash;
    (2) Unencumbered readily marketable assets;
    (3) Paid development expenses out-of-pocket; or
    (4) Contributed real property or improvements; and
    (C) The borrower contributed the minimum amount of capital 
described under paragraph (2)(iv)(B) of this definition before the 
Board-regulated institution advances funds (other than the advance of a 
nominal sum made in order to secure the Board-regulated institution's 
lien against the real property) under the credit facility, and such 
minimum amount of capital contributed by the borrower is contractually 
required to remain in the project until the HVCRE exposure has been 
reclassified by the Board-regulated institution as a non-HVCRE exposure 
under paragraph (6) of this definition;
    (3) An HVCRE exposure does not include any loan made prior to 
January 1, 2015;
    (4) An HVCRE exposure does not include a credit facility 
reclassified as a non-HVCRE exposure under paragraph (6).
    (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 Board-regulated institution, an Board-regulated institution may 
reclassify an HVCRE exposure as a non-HVCRE exposure upon--
    (i) The substantial completion of the development or construction 
of the real property being financed by the credit facility; and
    (ii) Cash flow being generated by the real property being 
sufficient to support the debt service and expenses of the real 
property, in accordance with the Board-regulated institution's 
applicable loan underwriting criteria for permanent financings.
* * * * *

12 CFR Part 324

Federal Deposit Insurance Corporation

    For the reasons set out in the joint preamble, the FDIC proposes to 
amend 12 CFR part 324 as follows.

PART 324--CAPITAL ADEQUACY OF FDIC--SUPERVISED INSTITUTIONS

Subpart A--General Provisions

0
5. The authority citation for part 324 continues to read as follows:

    Authority:  12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233, 
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, 
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).

0
6. Section 324.2 is amended by revising the definition of a ``high 
volatility commercial real estate (HVCRE) exposure'' as follows:


Sec.  324.2  Definitions.

* * * * *
    High volatility commercial real estate (HVCRE) exposure means:
    (1) A credit facility secured by land or improved real property 
that, prior to being reclassified by the FDIC-supervised institution as 
a non-HVCRE exposure pursuant to paragraph (6) of this definition --
    (i) Primarily finances, has financed, or refinances the 
acquisition, development, or construction of real property;
    (ii) Has the purpose of providing financing to acquire, develop, or 
improve such real property into income-producing real property; and
    (iii) Is dependent upon future income or sales proceeds from, or 
refinancing of, such real property for the repayment of such credit 
facility; provided that:
    (2) An HVCRE exposure does not include a credit facility 
financing--
    (i) The acquisition, development, or construction of properties 
that are--
    (A) One- to four-family residential properties;
    (B) Real property that would qualify as an investment in community 
development; or
    (C) Agricultural land;
    (ii) The acquisition or refinance of existing income-producing real 
property secured by a mortgage on such property, if the cash flow being 
generated by the real property is sufficient to support the debt 
service and expenses of the real property, in accordance with the FDIC-
supervised institution's applicable loan underwriting criteria for 
permanent financings;
    (iii) Improvements to existing income-producing improved real 
property secured by a mortgage on such property, if the cash flow being 
generated by the real property is sufficient to support the debt 
service and expenses of the real property, in accordance with the FDIC-
supervised institution's applicable loan underwriting criteria for 
permanent financings; or
    (iv) Commercial real property projects in which--
    (A) The loan-to-value ratio is less than or equal to the applicable 
maximum supervisory loan-to-value ratio as determined by the FDIC;
    (B) The borrower has contributed capital of at least 15 percent of 
the real property's appraised, `as completed' value to the project in 
the form of--
    (1) Cash;
    (2) Unencumbered readily marketable assets;
    (3) Paid development expenses out-of-pocket; or
    (4) Contributed real property or improvements; and
    (C) The borrower contributed the minimum amount of capital 
described under paragraph (2)(iv)(B) of this definition before the 
FDIC-supervised institution advances funds (other than the advance of a 
nominal sum made in order to secure the FDIC-supervised institution's 
lien against the real property) under the credit facility, and such 
minimum amount of capital contributed by the borrower is

[[Page 49001]]

contractually required to remain in the project until the HVCRE 
exposure has been reclassified by the FDIC-supervised institution as a 
non-HVCRE exposure under paragraph (6) of this definition;
    (3) An HVCRE exposure does not include any loan made prior to 
January 1, 2015;
    (4) An HVCRE exposure does not include a credit facility 
reclassified as a non-HVCRE exposure under paragraph (6).
    (5) Value Of contributed real property.--For the purposes of this 
definition of HVCRE exposure, the value of any real property 
contributed by a borrower as a capital contribution is the appraised 
value of the property as determined under standards prescribed pursuant 
to section 1110 of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (12 U.S.C. 3339), in connection with the 
extension of the credit facility or loan to such borrower.
    (6) Reclassification as a non-HVCRE exposure.--For purposes of this 
definition of HVCRE exposure and with respect to a credit facility and 
an FDIC-supervised institution, an FDIC-supervised institution may 
reclassify an HVCRE exposure as a non-HVCRE exposure upon--
    (i) The substantial completion of the development or construction 
of the real property being financed by the credit facility; and
    (ii) Cash flow being generated by the real property being 
sufficient to support the debt service and expenses of the real 
property, in accordance with the FDIC-supervised institution's 
applicable loan underwriting criteria for permanent financings.
* * * * *

    Dated: September 11, 2018.
Joseph M. Otting,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, September 18, 2018.
Ann E. Misback,
Secretary of the Board.
    Dated at Washington, DC, on September 12, 2018.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2018-20875 Filed 9-27-18; 8:45 am]
 BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P

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