Risk Weighting of High Volatility Commercial Real Estate (HVCRE) Exposures, 47601-47608 [2021-17560]

Agencies

• Farm Credit Administration

[Federal Register Volume 86, Number 163 (Thursday, August 26, 2021)]
[Proposed Rules]
[Pages 47601-47608]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17560]


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FARM CREDIT ADMINISTRATION

12 CFR Part 628

RIN 3052-AD42


Risk Weighting of High Volatility Commercial Real Estate (HVCRE) 
Exposures

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) is seeking 
comments on this proposed rule that would revise our regulatory capital 
requirements for Farm Credit System (FCS or System) institutions to 
define and establish risk-weightings for High Volatility Commercial 
Real Estate (HVCRE) exposures.

DATES: Please send us your comments on or before November 24, 2021.

ADDRESSES: For accuracy and efficiency reasons, please submit comments 
by email or through FCA's website. We do not accept comments submitted 
by facsimiles (fax), as faxes are difficult for us to process and 
achieve compliance with section 508 of the Rehabilitation Act of 1973. 
Please do not submit your comment multiple times via different methods. 
You may submit comments by any of the following methods:
     Email: Send us an email at [email protected].
     FCA Website: https://www.fca.gov. Click inside the ``I want 
to. . .'' field near the top of the page; select ``comment on a pending 
regulation'' from the dropdown menu; and click ``Go.'' This takes you 
to an electronic public comment form.
     Mail: Kevin J. Kramp, Director, Office of Regulatory 
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 
22102-5090.
    You may review copies of comments we receive on our website at 
https://www.fca.gov. Once you are on the website, click inside the ``I 
want to. . .'' field near the top of the page; select ``find comments 
on a pending regulation'' from the dropdown menu; and click ``Go.'' 
This will take you to the Comment Letters page where you can select the 
regulation for which you would like to read the public comments.
    We will show your comments as submitted, including any supporting 
data provided, but for technical reasons we may omit items such as 
logos and special characters. Identifying information that you provide, 
such as phone numbers and addresses, will be publicly available. 
However, we will attempt to remove email addresses to help reduce 
internet spam. You may also review comments at our office in McLean, 
Virginia. Please call us at (703) 883-4056 or email us at [email protected] to make an appointment.

FOR FURTHER INFORMATION CONTACT: 
    Technical information: Ryan Leist, [email protected], Senior 
Accountant, or Jeremy R. Edelstein, [email protected], Associate 
Director, Finance and Capital Markets Team, Office of Regulatory 
Policy, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4414, TTY (703) 883-4056 or [email protected]; or

[[Page 47602]]

    Legal information: Jennifer Cohn, [email protected], Senior Counsel, 
Office of General Counsel, Farm Credit Administration, McLean, VA 
22102-5090, (720) 213-0440, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Objectives of the Proposed Rule
    B. Background
II. Proposed Rule
    A. Scope of HVCRE Exposure Definition
    B. Exclusions From HVCRE Exposure Definition
    1. One- to Four-Family Residential Properties
    2. Agricultural Land
    3. Loans on Existing Income Producing Properties That Qualify as 
Permanent Financings
    4. Certain Commercial Real Property Projects
    a. Loan-to-Value Limits
    b. Contributed Capital
    c. Value Appraisal
    d. Project
    5. Reclassification as a Non-HVCRE Exposure
    6. Applicability Only to Loans Made After Effective Date
    C. Impact on Prior FCA Board Actions
III. Regulatory Flexibility Act Analysis

I. Introduction

A. Objectives of the Proposed Rule

    The FCA's objectives in proposing this rule are to:
     Update capital requirements to reflect the increased risks 
that exposures to certain acquisition, development or construction 
loans pose to System institutions; and
     Ensure that the System's capital requirements are 
comparable to the Basel III framework and the standardized approach the 
Federal banking regulatory agencies have adopted, with deviations as 
appropriate to accommodate the different operational and credit 
considerations of the System.

B. Background

    In October 2013 and April 2014, the Federal banking regulatory 
agencies (FBRAs) \1\ published in the Federal Register capital rules 
governing the banking organizations they regulate.\2\ Those rules 
follow the Basel Committee on Banking Supervision's (BCBS or Basel 
Committee) document entitled ``Basel III: A Global Regulatory Framework 
for More Resilient Banks and Banking Systems'' (Basel III), including 
subsequent changes to the BCBS's capital standards and BCBS 
consultative papers.\3\
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    \1\ The FBRAs are the Office of the Comptroller of the Currency 
(OCC), the Board of Governors of the Federal Reserve System (FRB), 
and the Federal Deposit Insurance Corporation (FDIC).
    \2\ 78 FR 62018 (October 11, 2013) (final rule of the OCC and 
the FRB); 79 FR 20754 (April 14, 2014) (final rule of the FDIC).
    \3\ Basel III was published in December 2010 and revised in June 
2011. The text is available at https://www.bis.org/publ/bcbs189.htm. 
The BCBS was established in 1974 by central banks with bank 
supervisory authorities in major industrial countries. The BCBS 
develops banking guidelines and recommends them for adoption by 
member countries and others. BCBS documents are available at https://www.bis.org. The FCA does not have representation on the Basel 
Committee as the FBRAs do.
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    On September 4, 2014, FCA published in the Federal Register a 
notice of proposed rulemaking seeking public comment on revisions to 
our regulatory capital requirements.\4\ Our proposed rule was 
comparable to the final rule of the FBRAs and the Basel III framework, 
while taking into account the cooperative structure and the 
organization of the System. Beginning in 2010, System institutions had 
sought for FCA to adopt a capital framework that was as similar as 
possible to the capital guidelines of the FBRAs as revised to implement 
the Basel III standards. In particular, System institutions had 
asserted that consistency of FCA capital requirements with those of the 
FBRAs would allow investors, shareholders, and others to better 
understand the financial strength and risk-bearing capacity of the 
System.\5\
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    \4\ 79 FR 52814.
    \5\ See 79 FR 52814, 52820. FCA is not required by law to follow 
the Basel Committee standards.
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    Included in the provisions we proposed to adopt was a 150 percent 
risk-weight for HVCRE exposures. Our proposed definition of HVCRE was 
very similar to the definition the FBRAs had adopted at the time. 
System commenters expressed concern about parts of the proposed HVCRE 
definition and asked us not to adopt the definition. We did not adopt 
the HVCRE provisions when we adopted our final capital rules because we 
wanted to further consider and analyze HVCRE.\6\ In the preamble to the 
final capital rule, we said that we expected to engage in additional 
HVCRE rulemaking in the future.\7\
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    \6\ 81 FR 49719, 49736 (July 28, 2016).
    \7\ See supra footnote 6.
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    Beginning in 2017, the FBRAs issued several proposed rules on HVCRE 
exposures, in an effort to address concerns with the original 
definition.\8\ On May 24, 2018, the Economic Growth, Regulatory Relief, 
and Consumer Protection Act (EGRRCPA) \9\ was enacted, adding a new 
statutory definition that would have to be satisfied for an exposure to 
be risk-weighted as an HVCRE exposure. On December 13, 2019, the FBRAs 
published a final rule, which became effective on April 1, 2020, 
implementing the EGRRCPA requirements.\10\
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    \8\ FCA staff submitted a comment letter in response to one of 
the proposals that communicated our concerns with a proposed 
exemption for agricultural land.
    \9\ Public Law 115-174, 132 Stat. 1296 (2018).
    \10\ 84 FR 68019.
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    Many of the provisions in the FBRAs' final rule address the 
concerns commenters raised in response to the FCA's 2014 proposed rule. 
Accordingly, to ensure that System institutions continue to hold enough 
regulatory capital to fulfill their mission as a Government-sponsored 
enterprise, we propose provisions that are, in general, similar to the 
FBRA provisions. However, we propose differences in two general areas. 
First, in their rule the FBRAs clarified the interpretation of certain 
terms generally to be consistent with their usage in other FBRA 
regulations or Call Report instructions; while we do not propose 
different interpretations of these terms, we do not propose to refer to 
these FBRA references, as we do not believe that is appropriate in our 
rules. Second, we propose some differences where appropriate to 
accommodate the different operational and credit considerations of the 
System, while continuing to maintain appropriate safety and soundness.

II. Proposed Rule

    Because of the increased risk in exposures that fall within the 
definition of HVCRE exposures, we propose, consistent with the FBRAs, 
to assign a 150 percent risk-weight to those exposures, rather than the 
100 percent risk-weight generally assigned to commercial real estate 
and other corporate exposures under FCA regulation Sec.  628.32(f)(1). 
As discussed below, our proposed rule is similar to the FBRAs' rule in 
most respects. In general, the same loan to the same borrower--whether 
it is made by a commercial bank or a System institution--carries the 
same risk and should be assigned the same risk-weight. The proposed 
definition of HVCRE exposure is intended to capture only those 
exposures that have increased risk characteristics in the acquisition, 
development, or construction of real property.
    As with the risk-weighting provisions of our capital rules 
generally, language in the proposed definition of HVCRE exposure that 
refers to the financing of certain types of property or projects does 
not itself provide authority for an institution to engage in that 
financing,

[[Page 47603]]

or to have an exposure to that property or project. This is a risk-
weighting regulation only.\11\ System scope and eligibility authorities 
are contained in other provisions of our regulations and in the Farm 
Credit Act of 1971, as amended (Act).\12\
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    \11\ As stated in the preamble to the Tier 1/Tier 2 Capital 
Framework final rule, ``We remind System institutions that the 
presence of a particular risk weighting does not itself provide 
authority for a System institution to have an exposure to that asset 
or item.'' See 81 FR 49719, 49722 (July 28, 2016).
    \12\ There may be overlap between HVCRE exposures and exposures 
to land in transition--agricultural land in the path of development. 
System institutions contemplating land in transition financing must 
review and understand FCA Bookletter BL-058 and must ensure they are 
in full compliance with all FCA regulations.
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A. Scope of HVCRE Exposure Definition

    As the FBRAs did, we propose to define an HVCRE exposure as ``a 
credit facility secured by land or improved real property'' that meets 
three criteria (and that does not meet any of the definition's 
exclusions, which are discussed below).\13\ The FBRAs defined this term 
in a manner that is consistent with the definition of ``a loan secured 
by real estate'' in their Call Report forms and instructions. In that 
definition, a loan is secured by real estate if the estimated value of 
the real estate collateral at origination (after deducting all senior 
liens held by others) is greater than 50 percent of the principal 
amount of the loan at origination.
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    \13\ FCA regulation Sec.  614.4240(q) defines ``real property'' 
as ``all interests, benefits, and rights inherent in the ownership 
of real estate.''
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    We propose to adopt the same meaning of ``a credit facility secured 
by land or improved real property'' as the FBRAs have adopted. 
Therefore, for example, if an institution makes a loan to construct and 
equip a building, and the loan is secured by both the real estate and 
the equipment, the institution must estimate the value of the building, 
upon completion, and of the equipment. If the value of the building is 
greater than 50 percent of the principal amount of the loan at 
origination, the loan would be a ``loan secured by real estate,'' and 
it would therefore be a ``credit facility secured by land or improved 
real property.'' \14\ If the value of the building, upon completion, is 
less than 50 percent of the principal amount of the loan at 
origination, it would not be a ``loan secured by real estate,'' and it 
would therefore not be a ``credit facility secured by land or improved 
real property.'' Accordingly, it would not be an HVCRE exposure.
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    \14\ A determination that a loan is a ``credit facility secured 
by land or improved real property'' does not mean that the loan is 
necessarily an HVCRE exposure. As mentioned above, a loan also has 
to satisfy three criteria, and not be subject to an exclusion, to be 
an HVCRE exposure.
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    Under our proposal, a ``credit facility secured by land or improved 
real property'' would not be classified as an HVCRE exposure unless it 
met the following three criteria. If such a credit facility did not 
meet all three criteria, it would not be an HVCRE exposure. First, the 
credit facility must primarily finance or refinance the acquisition, 
development, or construction of real property. Second, the purpose of 
the credit facility must be to provide financing to acquire, develop, 
or improve such real property into income-producing property. Finally, 
the repayment of the credit facility must depend upon the future income 
or sales proceeds from, or refinancing of, such real property.
    The first criterion is that the credit facility must primarily 
finance or refinance the acquisition, development, or construction of 
real property. This criterion is satisfied if more than 50 percent of 
the proposed use of the loan funds is for the acquisition, development, 
or construction of real property. The criterion is not satisfied if 50 
percent or less of the proposed use of the loan funds is for the 
acquisition, development, or construction of real property.
    The second criterion is that the credit facility has the purpose of 
providing financing to acquire, develop, or improve the real property 
into income-producing property.
    The third criterion is that the credit facility is dependent for 
repayment upon future income or sales proceeds from, or refinancing of, 
the real property. This criterion narrows the scope of the definition 
of HVCRE exposure from the definition we proposed in 2014. The 
definition we proposed in 2014 would have included within the scope of 
HVCRE exposures credit facilities for which repayment would be from the 
ongoing business of the borrower, as well as credit facilities that 
were dependent for repayment upon future income or sales proceeds.
    The Farm Credit Council and several System banks and association 
commenters expressed concern with the breadth of this definition from 
the 2014 proposal.\15\ This proposal addresses that concern, since 
credit facilities that will be repaid from the borrower's ongoing 
business would not be classified as an HVCRE exposure. We believe that 
a majority of System loans are repaid from the borrower's ongoing 
business rather than from future income or sales proceeds, and 
therefore that a majority of potential System HVCRE exposures would not 
meet this criterion and would not be HVCRE exposures.
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    \15\ See e.g., Farm Credit Council comment letter, Regulatory 
Capital, Implementation of Tier1/Tier2 Framework, dated February 13, 
2015.
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B. Exclusions From HVCRE Exposure Definition

    Under this proposal, the exposures described in the following 
paragraphs would be excluded from the definition of HVCRE exposure:
1. One- to Four-Family Residential Properties
    Under this proposal, as in the FBRA rule, an HVCRE exposure would 
not include a credit facility financing the acquisition, development, 
or construction of properties that are one- to four-family residential 
properties, provided that the dwelling (including attached components 
such as garages, porches, and decks) represents at least 50 percent of 
the total appraised value of the collateral secured by the first or 
subsequent lien.
    Manufactured homes permanently affixed to the underlying property, 
when deemed to be real property under state law, would qualify for this 
exclusion, as would construction loans secured by single family 
dwelling units, duplex units, and townhouses. Condominium and 
cooperative construction loans would qualify for this exclusion, even 
if the loan is financing the construction of a building with five or 
more dwelling units, as long as the repayment of the loan comes from 
the sale of individual condominium dwelling units or individual 
cooperative housing units. This exclusion would apply to all credit 
facilities that fall within its scope, whether rural home financing 
under Sec.  613.3030 or one- to four-family residential property 
financing under Sec.  613.3000(b). Similar to the reduced risk-weight 
assigned to residential mortgage exposures under Sec.  628.32(g)(1), a 
credit facility would qualify for this exclusion only if the property 
securing the credit facility exhibits characteristics of residential 
property rather than agricultural property including, but not limited 
to, the requirement that the dwelling (including attached components 
such as garages, porches, and decks) represents at least 50 percent of 
the total appraised value of the collateral secured by the first or 
subsequent lien. If examiners determined that the property was not 
residential in nature, the credit facility would not qualify for this 
exclusion.
    Loans for multifamily residential property construction (such as 
apartment buildings where loan repayment is dependent upon

[[Page 47604]]

apartment rental income) would not qualify for this exclusion.\16\
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    \16\ See supra footnote 11. Additionally, certain multifamily 
residential property may meet the ``other credit needs'' financing 
available to eligible borrowers as authorized by sections 1.11(a)(1) 
and 2.4(a)(1) of the Act and referenced in Sec.  613.3000.
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    Loans used solely to acquire undeveloped land would not qualify for 
this exclusion; the credit facility would also have to include 
financing for the construction of one- to four-family residential 
structures. Moreover, credit facilities that do not finance the 
construction of one- to four-family residential structures (as defined 
above), but instead solely finance improvements such as the laying of 
sewers, water pipes, and similar improvements to land, would not 
qualify for this exclusion. A credit facility that combines the 
financing of land development and the construction of one- to four-
family structures would qualify for this exclusion.
2. Agricultural Land
    We propose to exclude from the HVCRE definition credit facilities 
financing ``agricultural land,'' as defined in FCA regulation Sec.  
619.9025, or real estate used as an integral part of an aquatic 
operation. Section 619.9025 defines ``agricultural land'' as ``land 
improved or unimproved which is devoted to or available for the 
production of crops and other products such as but not limited to 
fruits and timber or for the raising of livestock.''
    This exclusion would apply only to financing for the agricultural 
and aquatic needs of bona fide farmers, ranchers, and producers and 
harvesters of aquatic products under Sec.  613.3000 of FCA regulations. 
It would not apply to loans for farm property construction and land 
development purposes.
    With one exception, we intend our proposed agricultural land 
exclusion to have the same scope as the agricultural land exclusion of 
the FBRAs. The FBRAs' definition of agricultural land has the same 
meaning as ``farmland'' in their Call Report forms and 
instructions.\17\ They define farmland as ``all land known to be used 
or usable for agricultural purposes, such as crop and livestock 
production. Farmland includes grazing or pastureland, whether tillable 
or not and whether wooded or not.'' Loans for farm property 
construction and land development purposes are not loans on 
``farmland,'' and therefore such loans do not fall within the 
agricultural land exclusion. Unlike the FBRAs, we propose to expressly 
include within the agricultural land exclusion real estate that is an 
integral part of an aquatic operation.
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    \17\ See Federal Financial Institutions Examination Council 
(FFIEC) 031 and FFIEC 041--Instructions for Preparation of 
Consolidated Reports of Condition and Income.
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    As the FBRAs did in their final rule, loans for land development 
purposes and farm property construction would not be eligible in this 
proposed rule for the agricultural land exclusion from the HVCRE 
exposure definition. Loans made for land development purposes would 
include loans made to finance property improvements, such as laying 
sewers or water pipes preparatory to erecting new structures. Loans 
made for farm property construction would include loans made to finance 
the on-site construction of industrial, commercial, residential, or 
farm buildings. For the purposes of this exclusion, ``construction'' 
includes not only construction of new structures, but also additions or 
alterations to existing structures and the demolition of existing 
structures to make way for new structures.
3. Loans on Existing Income Producing Properties That Qualify as 
Permanent Financings
    As in the FBRA rule, we propose to exclude from the definition of 
HVCRE exposure credit facilities that finance the acquisition or 
refinance of existing income-producing real property secured by a 
mortgage on such property, so long as the cash flow generated by the 
real property covers the debt service and expenses of the property in 
accordance with the System institution's underwriting criteria for 
permanent loans. We also propose to exclude credit facilities financing 
improvements to existing income-producing real property secured by a 
mortgage on such property. Examiners may review the reasonableness of a 
System institution's underwriting criteria for permanent loans through 
the regular examination process to ensure the real estate lending 
policies are consistent with safe and sound banking practices.
    We believe this income-producing property exclusion would address 
certain concerns expressed in comment letters from FCA's 2014 proposed 
HVCRE definition regarding agribusiness and rural utility loans. System 
institutions commented they did not believe the definition of HVCRE was 
intended to include agribusiness or rural project financing 
transactions to build processing and marketing facilities or rural 
infrastructure. Under this proposal, these types of loans could qualify 
for the income-producing property exclusion if the cash flow being 
generated by the real property is sufficient to support the debt 
service and expenses of the real property in accordance with the System 
institution's underwriting criteria for permanent loans.
    Agribusiness and rural project loans that are not secured by 
existing income-producing real property would not fall under this 
exclusion. Such loans often pose a greater credit risk than permanent 
loans. We believe it is appropriate to classify these loans as HVCRE 
exposures and impose a 150 percent risk-weight given their increased 
risk compared to other commercial real estate exposures (unless the 
loan satisfies one of the other exclusions). However, as discussed in 
section 5--Reclassification as a Non-HVCRE Exposure section below, a 
System institution would be allowed to reclassify these HVCRE exposures 
as a non-HVCRE exposure if two conditions are met:
     Substantial completion of the development or construction 
on the real property has occurred; and
     the cash flow generated by the property covers the debt 
service and expenses on the property in accordance with the System 
institution's loan underwriting standards for permanent financings.
4. Certain Commercial Real Property Projects
    As in the FBRA rule, we propose to exclude from the definition of 
HVCRE exposure credit facilities for certain commercial real property 
projects that are underwritten in a safe and sound manner in accordance 
with proposed loan-to-value (LTV) limits and where the borrower has 
contributed a specified amount of capital to the project. A commercial 
real property project loan generally is used to acquire, develop, 
construct, improve, or refinance real property, and the primary source 
of repayment is dependent on the sale of the real property or the 
revenues from third-party rent or lease payments. Commercial real 
property project loans do not include ordinary business loans and lines 
of credit in which real property is taken as collateral. As it relates 
to the System, we believe this exclusion is most relevant to 
agribusiness (processing and marketing entities and farm-related 
businesses) and rural project loans.
    In order to qualify for this exclusion, a credit facility that 
finances a commercial real property project would be required to meet 
four distinct criteria. First, the LTV ratio would have to be less than 
or equal to the applicable maximum set forth in proposed Appendix A. 
Second, the borrower

[[Page 47605]]

would have to contribute capital of at least 15 percent of the real 
property's value to the project. Third, the 15 percent amount of 
contributed capital would have to be contributed prior to the 
institution's advance of funds (other than a nominal sum to secure the 
institution's lien on the real property). Fourth, the 15 percent amount 
of contributed capital would have to be contractually required to 
remain in the project until the loan could be reclassified as a non-
HVCRE exposure. The proposed interpretations of terms relevant to the 
four criteria for this exclusion are discussed below.
a. Loan-to-Value Limits
    To qualify for this exclusion from the HVCRE exposure definition, 
the FBRAs' rule requires that a credit facility be underwritten in a 
safe and sound manner in accordance with the Supervisory Loan-to-Value 
Limits contained in the Interagency Guidelines for Real Estate Lending 
Policies.\18\ These Interagency Guidelines require banking 
institutions, for real estate loans, to establish internal LTV limits 
that do not exceed specified supervisory limits ranging from 65 percent 
for raw land to 85 percent for 1- to 4-family residential and improved 
property.
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    \18\ See 12 CFR part 365, subpart A, Appendix A (FDIC); 12 CFR 
part 208, Appendix C (FRB); 12 CFR part 34, Appendix A (OCC).
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    The FCA has not adopted these supervisory LTV limits.\19\ 
Nevertheless, FCA examination guidance from 2009 makes clear that FCA 
expectations are consistent with the Interagency Guidelines, including 
the supervisory LTV limits.\20\ We believe exposures should satisfy 
these LTV limits to qualify for this exclusion to the HVCRE definition. 
We propose to adopt these LTV limits, for the purpose of the HVCRE 
definition only, in a new Appendix A to part 628.
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    \19\ Section 1.10(a) of the Act and Sec.  614.4200(b)(1) of FCA 
regulations require at least an 85 percent LTV ratio for long-term 
real estate mortgage loans that are comprised primarily of 
agricultural or rural property, except for loans that have 
government guarantees or are covered by private mortgage insurance. 
Under Sec.  614.4200(b)(1), agricultural or rural property includes 
agricultural land and improvements thereto, a farm-related business, 
a marketing or processing operation, a rural residence, or real 
estate used as an integral part of an aquatic operation.
    \20\ Examination Bulletin FCA 2009-2, Guidance for Evaluating 
the Safety and Soundness of FCS Real Estate Lending (focusing on 
land in transition), December 2009.
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b. Contributed Capital
    Under the proposal, cash, unencumbered readily marketable assets, 
paid development expenses out-of-pocket, and contributed real property 
or improvements would count as forms of capital for purposes of the 15 
percent capital contribution criterion. A System institution could 
consider costs incurred by the project and paid by the borrower prior 
to the advance of funds by the System institution as out-of-pocket 
development expenses paid by the borrower.
    The FBRAs' version of the rule provides that the value of 
contributed real property means the appraised value of real property 
contributed by the borrower as determined under the standards 
prescribed by the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (12 U.S.C. 3339) (FIRREA). Because FCA is not 
named in FIRREA as one of the Federal financial regulatory agencies 
covered by its real estate appraisal provisions, our proposal does not 
expressly require that the value must be determined under the FIRREA 
standards; rather, we propose to require that the value must be 
determined in accordance with FCA regulations at Subpart F of 12 CFR 
part 614. FCA's collateral evaluation rules are generally similar, 
although not identical, to the FIRREA standards, however, and therefore 
there should be few substantive differences in the approach to 
valuation.
    FCA has long recognized that Congress, through the enactment of 
FIRREA, expressed a strong belief that all financial transactions 
involving real property collateral should be supported by adequate and 
accurate collateral evaluations. Congress also expressed the belief 
that such collateral evaluations should be based on standards and 
guidelines that are consistently applied by the financial and appraisal 
industries. We believe that following the collateral evaluation 
requirements of FIRREA and the overarching beliefs of Congress is an 
essential element of the safe and sound lending activities covered by 
the System. FCA's collateral evaluation regulations, at 12 CFR part 
614, subpart F, are generally similar, although not identical, to the 
FIRREA appraisal requirements.\21\
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    \21\ See FCA Informational Memorandum, Guidance on Addressing 
Personal and Intangible Property within Collateral Evaluation 
Policies and Procedures (Sec.  614.4245), August 29, 2016; FCA 
Examination Manual EM-22.6, Loan Portfolio Management: Collateral 
Risk management, dated August 20, 2014.
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    The value of the real property that could count toward the 15 
percent contributed capital requirement would be reduced by the 
aggregate amount of any liens on the real property securing the HVCRE 
exposure.
    To ensure that tangible equity is invested in the project, funds 
borrowed from a third party (such as another lender, an owner or parent 
organization, or a related party) could count toward the capital 
contribution as long as the borrowed funds are not derived from, 
related to, or encumber any collateral that has been contributed to the 
project. Additionally, the recognition of any contribution of funds to 
a project would have to be in conformance with safe and sound lending 
practices and in accordance with the System institution's underwriting 
criteria and internal policies.
    In addition, contributed property or improvements would have to be 
directly related to the project to be eligible to count towards the 
capital contribution. Real estate not developed as part of the project 
would not be counted toward the capital contribution.
    We would interpret the term ``unencumbered readily marketable 
assets'' to mean insured deposits, financial instruments, and bullion 
in which the System institution has a perfected interest. For 
collateral to be considered ``readily marketable'' by a System 
institution, the institution's expectation would be that the financial 
instrument and bullion would be salable under ordinary circumstances 
with reasonable promptness at a fair market value determined by 
quotations based on actual transactions, an auction or similarly 
available daily bid and ask price market.\22\ Readily marketable 
collateral should be appropriately discounted by the institution 
consistent with the institution's usual practices for making loans 
secured by such collateral. Examiners may review the reasonableness of 
a System institution's underwriting criteria to ensure the real estate 
lending policies are consistent with safe and sound banking practices.
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    \22\ This interpretation is consistent with the definitions of 
``unencumbered'' and ``marketable'' in Sec.  615.5134 of our 
regulations.
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c. Value Appraisal
    Under the proposal, the 15 percent capital contribution would be 
required to be calculated using the real property's value. An appraised 
``as completed'' value is preferred; however, an ``as completed'' value 
appraisal may not always be available, such as in the case of 
purchasing raw land without plans for development in the near term, 
which would typically have an ``as is'' value appraisal. Therefore, we 
propose to permit the use of an ``as is'' appraisal, if an ``as 
completed'' appraisal is not available, for purposes of the 15 percent 
capital contribution.\23\
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    \23\ We intend that the terms ``as completed'' and ``as is,'' as 
used in the definition of HVCRE exposure, would have the same 
meaning as in the Interagency Appraisal and Evaluation Guidelines 
(December 2, 2010), issued by the OCC, the FRB, the FDIC, the Office 
of Thrift Supervision, and the National Credit Union Administration. 
Under these Guidelines, ``as completed'' reflects property's market 
value as of the time that development is expected to be completed, 
and ``as is'' means the estimate of the market value of real 
property in its current physical condition, use, and zoning as of 
the appraisal's effective date.

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[[Page 47606]]

    In addition, we would allow the use of a collateral evaluation of 
the real property instead of an appraisal to determine the value, for 
purposes of the HVCRE exposure definition, where our appraisal 
regulations \24\ permit collateral evaluations to be used in lieu of 
appraisals.
---------------------------------------------------------------------------

    \24\ See Sec.  614.4260(c), which sets forth the types of real 
estate-related transactions that do not require appraisals.
---------------------------------------------------------------------------

    The FBRAs' regulatory exclusion for Certain Commercial Real 
Property Projects specifies that an ``as completed'' value appraisal 
must be used. This is consistent with the EGRRCPA's statutory 
definition for the Certain Commercial Real Property Projects exclusion, 
which included only appraised ``as completed'' values. As explained by 
the FBRAs, the EGRRCPA required this appraised ``as completed'' value 
for their regulations. In the preamble of their final rule, the FBRAs 
clarified their definition allows ``as is'' appraisals for raw land 
loans and collateral evaluations for loans in amounts under certain 
specified thresholds in their appraisal regulations.\25\ However, the 
FBRAs did not change the wording of the EGRRCPA's statutory definition 
in their regulations to reflect this interpretation. The EGRRCPA does 
not apply to System institutions, and FCA is not required to adopt the 
statutory definition. Accordingly, we propose to deviate from the 
statutory definition for Certain Commercial Real Property Projects to 
include ``as is'' appraisals and collateral evaluations to align our 
regulation with the FBRAs' interpretation of the definition.
---------------------------------------------------------------------------

    \25\ See 84 FR 68019, 68027 (December 13, 2019).
---------------------------------------------------------------------------

d. Project
    In this proposal, the 15 percent capital contribution and the 
appraisal or collateral evaluation would be measured in relation to a 
``project.'' Some credit facilities for the acquisition, development, 
or construction of real property may have multiple phases as part of a 
larger construction or development project. In the case of a project 
with multiple phases, in order for a loan financing a phase to be 
eligible for the contributed capital exclusion, the phase must have its 
own appraised value or an appropriate evaluation in order for it to be 
deemed a separate ``project'' for the purpose of the 15 percent capital 
contribution calculation. We expect that each project phase being 
financed by a credit facility have a proper appraisal or evaluation 
with an associated ``as completed'' or ``as is'' value. Where 
appropriate and in accordance with the System institution's applicable 
underwriting standards, a System institution may look at a multiphase 
project as a complete project rather than as individual phases.
5. Reclassification as a Non-HVCRE Exposure
    Under the proposal, a System institution would be allowed to 
reclassify an HVCRE exposure as a non-HVCRE exposure when the 
substantial completion of the development or construction on the real 
property has occurred and the cash flow generated by the property 
covered the debt service and expenses on the property in accordance 
with the institution's loan underwriting standards for permanent 
financings. We expect each System institution to have prudent, clear, 
and measurable underwriting standards, which we may review through the 
examination process.
6. Applicability Only to Loans Made After Effective Date
    In consideration of the changes this rule would require, we propose 
that only loans made after the effective date of this rule would be 
subject to the HVCRE risk-weighting requirements. Loans made prior to 
the rule's effective date could continue to be risk-weighted as if the 
rule had not been adopted.
    After the effective date, when a System institution modifies a loan 
or if a project is altered in a manner that materially changes the 
underwriting of the credit facility (such as increases to the loan 
amount, changes to the size and scope of the project, or removing all 
or part of the 15 percent minimum capital contribution in a project), 
the institution must treat the loan as a new exposure and reevaluate 
the exposure to determine whether or not it is an HVCRE exposure.

C. Impact on Prior FCA Board Actions

    FCA Bookletter BL-070 authorizes System institutions to assign a 
reduced risk-weight (lower than the 100 percent risk-weight generally 
assigned to commercial real estate exposures under FCA regulation Sec.  
628.32(f)(1)) for rural water and wastewater (RWW) facilities that 
satisfy criteria.\26\ BL-070 does not permit this reduced risk-weight 
for exposures when a RWW facility is not fully operational due to 
initial construction or major renovation; instead, institutions must 
assign risk-weights to these ``major construction'' exposures in 
accordance with Part 628 of our regulations.\27\ If this proposed 
regulation is adopted, BL-070 would continue to assign risk-weights to 
these ``major construction'' exposures in accordance with Part 628 as 
it would be amended; in other words, an exposure to a RWW facility that 
is not fully operational due to initial construction or major 
renovation would continue to be assigned a risk-weight in accordance 
with Part 628 (either as an HVCRE exposure or as a corporate exposure 
under Sec.  628.32(f)(1), depending on whether it satisfies the 
definition of HVCRE exposure or not). Under BL-070, a RWW exposure 
during construction or major renovation, when the facility is not fully 
operational, may not be assigned a reduced risk-weight. All other RWW 
exposures would continue to receive reduced risk-weights in accordance 
with BL-070.
---------------------------------------------------------------------------

    \26\ BL-070: Revised Capital Treatment for Certain Water and 
Wastewater Exposures, November 8, 2018.
    \27\ BL-070 does allow the reduced risk-weight for exposures 
during routine repair, upgrade, or maintenance projects that do not 
impede the facility's full operation.
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    FCA Bookletter BL-053 authorizes System institutions to assign a 
reduced risk-weight to certain electric cooperative exposures, 
including for some power plants that are in the construction phase.\28\ 
This treatment is authorized under our reservation of authority.\29\ In 
the future, we may consider whether the risk-weight authorized by BL-
053 remains appropriate.
---------------------------------------------------------------------------

    \28\ FCA BL-053: Revised Regulatory Capital Treatment for 
Certain Electric Cooperatives Assets, February 12, 2007.
    \29\ See Sec.  628.1(d)(3).
---------------------------------------------------------------------------

III. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule would 
not have a significant economic impact on a substantial number of small 
entities. Each of the banks in the System, considered together with its 
affiliated associations, has assets and annual income in excess of the 
amounts that would qualify them as small entities. Therefore, System 
institutions are not ``small entities'' as defined in the Regulatory 
Flexibility Act.

[[Page 47607]]

List of Subjects in 12 CFR Part 628

    Accounting, Agriculture, Banks, Banking, Capital, Government 
securities, Investments, Rural areas.

    For the reasons stated in the preamble, part 628 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
as follows:

PART 628--CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS

0
1. The authority citation for part 628 continues to read as follows:

    Authority:  Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 
5.17, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12 
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 
2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252, 
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 ((12 U.S.C. 
2154 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15 
U.S.C. 78o-7 note).

0
2. Amend Sec.  628.2 by adding paragraph (6) to the definition of 
``Corporate exposure'' and a new definition, in alphabetical order, for 
``High volatility commercial real estate (HVCRE) exposure'' to read as 
follows:


Sec.  628.2  Definitions.

* * * * *
    Corporate exposure * * *
* * * * *
    (6) A high volatility commercial real estate (HVCRE) exposure;
* * * * *
    High volatility commercial real estate (HVCRE) exposure means:
    (1) A credit facility secured by land or improved real property 
that, prior to being reclassified by the System institution as a non-
HVCRE exposure pursuant to paragraph (6) of this definition:
    (i) Primarily finances, has financed, or refinances the 
acquisition, development, or construction of real property;
    (ii) Has the purpose of providing financing to acquire, develop, or 
improve such real property into income producing real property; and
    (iii) Is dependent upon future income or sales proceeds from, or 
refinancing of, such real property for the repayment of such credit 
facility.
    (2) An HVCRE exposure does not include a credit facility financing:
    (i) The acquisition, development, or construction of properties 
that are:
    (A) One- to four-family residential properties, provided that the 
dwelling (including attached components such as garages, porches, and 
decks) represents at least 50 percent of the total appraised value of 
the collateral secured by the first or subsequent lien. Credit 
facilities that do not finance the construction of one- to four-family 
residential structures, but instead solely finance improvements such as 
the laying of sewers, water pipes, and similar improvements to land, do 
not qualify for the one- to four-family residential properties 
exclusion;
    (B) [Reserved]
    (C) Agricultural land, as defined in Sec.  619.9025 of this 
chapter, or real estate used as an integral part of an aquatic 
operation. This provision applies only to financing for the 
agricultural and aquatic needs of bona fide farmers, ranchers, and 
producers and harvesters of aquatic products under Sec.  613.3000 of 
this chapter. This provision does not apply to loans for farm property 
construction and land development purposes;
    (ii) The acquisition or refinance of existing income-producing real 
property secured by a mortgage on such property, if the cash flow being 
generated by the real property is sufficient to support the debt 
service and expenses of the real property, in accordance with the 
System institution's applicable loan underwriting criteria for 
permanent financings;
    (iii) Improvements to existing income producing improved real 
property secured by a mortgage on such property, if the cash flow being 
generated by the real property is sufficient to support the debt 
service and expenses of the real property, in accordance with the 
System institution's applicable loan underwriting criteria for 
permanent financings; or
    (iv) Commercial real property projects in which:
    (A) The loan-to-value ratio is less than or equal to the applicable 
loan-to-value limit set forth in Appendix A to this part;
    (B) The borrower has contributed capital of at least 15 percent of 
the real property's appraised, ``as completed'' value to the project. 
The use of an ``as is'' appraisal is allowed in instances where an ``as 
completed'' value appraisal is not available. The use of an evaluation 
of the real property instead of an appraisal to determine the ``as 
completed'' appraised value is allowed if Sec.  614.4260(c) of this 
chapter permits evaluations to be used in lieu of appraisals. The 
contribution may be in the form of:
    (1) Cash;
    (2) Unencumbered readily marketable assets;
    (3) Paid development expenses out-of-pocket; or
    (4) Contributed real property or improvements; and
    (C) The borrower contributed the amount of capital required by 
paragraph (2)(iv)(B) of this definition before the System institution 
advances funds (other than the advance of a nominal sum made in order 
to secure the System institution's lien against the real property) 
under the credit facility, and such minimum amount of capital 
contributed by the borrower is contractually required to remain in the 
project until the HVCRE exposure has been reclassified by the System 
institution as a non-HVCRE exposure under paragraph (6) of this 
definition.
    (3) An HVCRE exposure does not include any loan made prior to the 
effective date of this rule.
    (4) An HVCRE exposure does not include a credit facility 
reclassified as a non-HVCRE exposure under paragraph (6) of this 
definition.
    (5) Value of contributed real property: For the purposes of this 
HVCRE exposure definition, the value of any real property contributed 
by a borrower as a capital contribution is the appraised value of the 
property as determined under standards prescribed in accordance with 
FCA regulations at subpart F of part 614 of this chapter, in connection 
with the extension of the credit facility or loan to such borrower.
    (6) Reclassification as a non-HVCRE exposure: For purposes of this 
HVCRE exposure definition and with respect to a credit facility and a 
System institution, a System institution may reclassify an HVCRE 
exposure as a non-HVCRE exposure upon:
    (i) The substantial completion of the development or construction 
of the real property being financed by the credit facility; and
    (ii) Cash flow being generated by the real property being 
sufficient to support the debt service and expenses of the real 
property, in accordance with the System institution's applicable loan 
underwriting criteria for permanent financings.
    (7) [Reserved].
* * * * *
0
3. Amend Sec.  628.32 by adding paragraph (j) to read as follows:


Sec.  628.32   General risk weights.

* * * * *
    (j) High volatility commercial real estate (HVCRE) exposures. A 
System institution must assign a 150-percent risk weight to an HVCRE 
exposure.
* * * * *
0
4. Amend Sec.  628.63 by adding entry (b)(8) to Table 3 to Sec.  628.63 
to read as follows:

[[Page 47608]]

Sec.  628.63  Disclosures.

* * * * *
    (b) * * *
    (4) * * *
* * * * *

               Table 3 to Sec.   628.63--Capital Adequacy
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
                              * * * * * * *
Quantitative disclosures...............  (b) Risk-weighted assets for:
 
                              * * * * * * *
                                         (8) HVCRE exposures;
 
                              * * * * * * *
------------------------------------------------------------------------

* * * * *
0
5. Add Appendix A to Part 628 to read as follows:

Appendix A to Part 628--Loan-to-Value Limits for High Volatility 
Commercial Real Estate Exposures

    Table A sets forth the loan-to-value limits specified in 
paragraph (2)(iv)(A) of the definition of high volatility commercial 
real estate exposure in Sec.  628.2.

Table A--Loan-to-Value Limits for High Volatility Commercial Real Estate
                                Exposures
------------------------------------------------------------------------
                                                           Loan-to-value
                      Loan category                            limit
                                                             (percent)
------------------------------------------------------------------------
Raw Land................................................              65
Land development........................................              75
Construction:                                             ..............
    Commercial, multifamily,\1\ and other non-                        80
     residential........................................
    1- to 4-family residential..........................              85
    Improved property...................................              85
    Owner-occupied 1- to 4-family and home equity.......          \2\ 85
------------------------------------------------------------------------
\1\ Multifamily construction includes condominiums and cooperatives.
\2\ If a loan is covered by private mortgage insurance, the loan-to-
  value (LTV) may exceed 85 percent to the extent that the loan amount
  in excess of 85 percent is covered by the insurance. If a loan is
  guaranteed by Federal, State, or other governmental agencies, the LTV
  limit is 97 percent.

    The loan-to-value limits should be applied to the underlying 
property that collateralizes the loan. For loans that fund multiple 
phases of the same real estate project (e.g., a loan for both land 
development and construction of an office building), the appropriate 
loan-to-value limit is the limit applicable to the final phase of 
the project funded by the loan; however, loan disbursements should 
not exceed actual development or construction outlays. In situations 
where a loan is fully cross-collateralized by two or more properties 
or is secured by a collateral pool of two or more properties, the 
appropriate maximum loan amount under loan-to-value limits is the 
sum of the value of each property, less senior liens, multiplied by 
the appropriate loan-to-value limit for each property. To ensure 
that collateral margins remain within the limits, System 
institutions should redetermine conformity whenever collateral 
substitutions are made to the collateral pool.

    Dated: August 12, 2021.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2021-17560 Filed 8-25-21; 8:45 am]
BILLING CODE 6705-01-P