Risk-Weighting of High Volatility Commercial Real Estate (HVCRE) Exposures, 25117-25130 [2024-07060]
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25117
Rules and Regulations
Federal Register
Vol. 89, No. 70
Wednesday, April 10, 2024
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents.
FARM CREDIT ADMINISTRATION
12 CFR Part 628
RIN 3052–AD42
Risk-Weighting of High Volatility
Commercial Real Estate (HVCRE)
Exposures
Farm Credit Administration.
Final rule.
AGENCY:
ACTION:
The Farm Credit
Administration (FCA or Agency) is
amending its regulatory capital
requirements for Farm Credit System
(FCS or System) banks and associations
to define and establish a risk weight for
High Volatility Commercial Real Estate
(HVCRE) exposures.
DATES: The final rule will be effective
January 1, 2025.
FOR FURTHER INFORMATION CONTACT:
Technical information: Ryan Leist,
LeistR@fca.gov, Associate Director,
Finance and Capital Markets Team, or
Xahra Pollard, PollardX@fca.gov, Senior
Policy Analyst, Office of Regulatory
Policy, (703) 883–4223, TTY (703) 883–
4056 or ORPMailbox@fca.gov; or
Legal information: Jennifer Cohn,
CohnJ@fca.gov, Assistant General
Counsel, Office of General Counsel,
(703) 883–4020, TTY (703) 883–4056.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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Table of Contents
I. Introduction
A. Objectives of the Final Rule
B. Background
1. Farm Credit System
2. Post-Financial Crisis Capital
Rulemakings
3. ADC Lending Risk and HVCRE Risk
Weight
II. Summary of the Proposed Rule, Comments
Received, and Final Rule
A. Summary of the Proposed Rule
B. Comments Received
C. Discussion of Final Rule and Responses
to Comments
1. Scope of HVCRE Exposure Definition
2. Exclusions From HVCRE Exposure
Definition
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a. One- to Four-Family Residential
Properties
b. Agricultural Land
c. Loans on Existing Income Producing
Properties That Qualify as Permanent
Financings
d. Certain Commercial Real Property
Projects
i. Loan-to-Value Limits
ii. Contributed Capital
iii. Value Appraisal
iv. Project
e. Loans Originated for Less Than $500,000
f. Consideration of Additional Exclusions
i. Project Financing of Public and Private
Facilities
ii. Agricultural Production or Processing
Facilities With Contractual Purchase
Agreements in Place
iii. Minor Improvements or Alterations to
Real Property
iv. Credit Facilities Where Repayment
Would Be From the Ongoing Business of
the Borrower
v. De Minimis Financings
3. Reclassification as a Non-HVCRE
Exposure
4. Applicability Only to Loans Made After
January 1, 2025
5. Impact on Prior FCA Board Actions
III. Regulatory Analysis
A. Regulatory Flexibility Act
B. Congressional Review Act
I. Introduction
A. Objectives of the Final Rule
FCA’s objectives in adopting this rule
are to:
• Update capital requirements to
reflect the increased risk characteristics
exposures to certain acquisition,
development or construction (ADC)
loans pose to System institutions; and
• Ensure the System’s capital
requirements are comparable to the
Basel Framework issued by the Basel
Committee on Banking Supervision
(BCBS or Basel Committee) and the
standardized approach the Federal
banking regulatory agencies (FBRAs)
have adopted,1 with deviations as
appropriate to accommodate the
different regulatory, operational, and
credit considerations of the System.
1 The FBRAs are the Office of the Comptroller of
the Currency (OCC), Board of Governors of the
Federal Reserve System (FRB), and the Federal
Deposit Insurance Corporation (FDIC). In general,
under the standardized approach, an institution’s
regulator assigns fixed risk weights to exposures
based on their relative risk characteristics. (See
Basel Framework at CRE 20).
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B. Background
1. Farm Credit System
In 1916, Congress created the System
to provide permanent, affordable, and
reliable sources of credit and related
services to American agricultural and
aquatic producers. As of January 1,
2024, the System consists of three Farm
Credit Banks, one agricultural credit
bank, 55 agricultural credit associations,
one Federal land credit association,
several service corporations, and the
Federal Farm Credit Banks Funding
Corporation (Funding Corporation).2
System banks (including both the Farm
Credit Banks and the agricultural credit
bank) issue Systemwide consolidated
debt obligations in the capital markets
through the Funding Corporation,3
which enables the System to extend
short-, intermediate-, and long-term
credit and related services to eligible
borrowers. Eligible borrowers include
farmers, ranchers, aquatic producers
and harvesters and their cooperatives,
rural utilities, exporters of agricultural
commodities products, farm-related
businesses, and certain rural
homeowners. The System’s enabling
statute is the Farm Credit Act of 1971,
as amended (Act).4
2. Post-Financial Crisis Capital
Rulemakings
In October 2013 and April 2014, the
FBRAs published in the Federal
Register capital rules governing the
banking organizations they regulate (the
U.S. rule).5 When it was adopted, the
U.S. rule reflected, in part, the BCBS’s
2 The Federal Agricultural Mortgage Corporation
(Farmer Mac) is a Farm Credit System institution
that was established in 1988 to create a secondary
market for agricultural real estate mortgage loans
and other rural-focused loans. The FCA has a
separate set of capital regulations, at subpart B of
part 652, that apply to Farmer Mac. This
rulemaking does not affect Farmer Mac, and the use
of the term ‘‘System institution’’ in this preamble
and rule does not include Farmer Mac.
3 The Funding Corporation was established
pursuant to section 4.9 of the Farm Credit Act of
1971, as amended, and is owned by all System
banks. The Funding Corporation is the fiscal agent
and disclosure agent for the System. The Funding
Corporation is responsible for issuing and
marketing debt securities to finance the System’s
loans, leases, and operations and for preparing and
producing the System’s financial results.
4 12 U.S.C. 2001–2279cc. The Act is available at
www.fca.gov under ‘‘Laws and regulations’’ and
‘‘Statutes.’’
5 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).
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document entitled ‘‘Basel III: A Global
Regulatory Framework for More
Resilient Banks and Banking Systems’’
(Basel III).6 Although the U.S. rule has
been updated since then, the risk
weights generally have not changed.
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.7 Basel III
was an internationally agreed upon set
of measures developed in response to
the 2007–2009 worldwide financial
crisis with the goal of strengthening the
regulation, supervision, and risk
management of banks. Since that time,
the BCBS has revised, updated, and
integrated the Basel III reforms into a
consolidated Basel Framework (Basel
Framework), which comprises of all of
the current and forthcoming BCBS
standards.8 U.S. banking regulators are
not required by law to adopt the Basel
Framework but, as discussed above, the
U.S. rule, which the FBRAs continue to
update,9 is Basel-based.10
FCA has had tier 1/tier 2 capital rules
that are comparable to the Basel
guidelines and the U.S. rule since
2016.11 Beginning in 2010, System
institutions requested FCA adopt a
capital framework that was as similar as
possible to the capital guidelines of the
6 See ‘‘Basel III: A global regulatory framework for
more resilient banks and banking systems,’’ revised
version June 2011, and other Basel III documents
at https://www.bis.org/bcbs/basel3.htm?m=2572.
Prior to the FBRAs’ adoption of these regulations,
their rules reflected earlier Basel frameworks.
7 The FBRAs are represented on the Basel
Committee, but the FCA is not.
8 The Basel Framework can be found at https://
www.bis.org/basel_framework/index.htm, and the
BCBS continues to update it as indicated on the
website.
9 On September 18, 2023, the FBRAs issued a
notice of proposed rulemaking (FR 88 64028) that
would substantially revise the capital requirements
applicable to large banking organizations and to
banking organizations with significant trading
activity. The proposed revisions would be generally
consistent with recent changes to international
capital standards by the BCBS.
10 The Federal Housing Finance Agency, which
oversees the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation,
has also adopted Basel-based capital rules.
11 While FCA’s earlier capital regulations
incorporated some elements of Basel standards and
the FBRAs’ rules, particularly the risk weighting of
assets in the denominator of the capital ratios, the
rule FCA adopted in 2016 aligned the System’s
capital requirements more closely with the Basel III
framework and with the U.S. rule’s standardized
approach (which was based on Basel standards).
See 81 FR 49720 (July 28, 2016). FCA has amended
its capital rules since 2016, most significantly in
2021. See 86 FR 54347 (October 1, 2021). Like the
FBRAs, FCA is not required by law to follow the
Basel standards. The FCA’s rule differed in some
respects from the Basel standards and the U.S. rule
in consideration of the cooperative structure and
the organization of the System.
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FBRAs. 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.12
3. ADC Lending Risk and HVCRE Risk
Weight
Included in the provisions of FCA’s
2014 proposed rulemaking to revise its
regulatory capital requirements was a
150 percent risk weight for HVCRE
exposures due to their higher risk
characteristics.13 As discussed below,
HVCRE exposures are defined as
acquisition, development, or
construction exposures that meet certain
criteria, and do not qualify for any of the
exclusions, in the definition.
HVCRE exposures have increased risk
characteristics supporting a 150 percent
risk weight. Key risks to projects during
the development and construction
phase include, among others, financial
risks, contract risks, and environmental
risks. Financial risks include, but are
not limited to, project delays and cost
overruns, sponsor risk, project
feasibility risk, and contractor risks.
While these risks can be a threat to any
type of lending, they are of particular
risk to construction loans, because they
can hinder project completion, and
repayment of construction loans usually
cannot begin until the project is
finished.14
Project delays and cost overruns are
two key financial risks to construction
loans. Supply chain constraints, permit
delays, and labor shortages are some
examples of factors that can contribute
to the delay of projects or their costs
exceeding budget. Other financial risks
include sponsor, project feasibility, and
contractor risks. Sponsors without
adequate and relevant industry and
project planning experience and
expertise increase the risk of a
construction project incurring
additional costs and delays, including
12 See
79 FR 52814, 52820 (September 4, 2014).
FR 52814 (September 4, 2014).
14 Projects where repayment can begin before
completion have fewer risk characteristics and may
warrant a lower risk weight. As discussed in
Section II.C.1 of this preamble—Scope of HVCRE
Exposure Definition—under the third criterion of
the HVCRE exposure definition, a credit facility that
will be repaid from the borrower’s ongoing
business, as opposed to being repaid from future
income or sales proceeds from the property, would
not be classified as an HVCRE exposure. Moreover,
as discussed in Section II.C.2.c of this preamble—
Loans on Existing Income Producing Properties
That Qualify as Permanent Financings—loans on
existing income producing properties that qualify as
permanent financings are excluded from the
definition of HVCRE exposure.
13 79
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permitting delays. Inadequate sponsor
financial strength can impact the
availability of sponsor capital when
needed for budget overruns. Project
feasibility considerations include
changes in either supply or demand
factors, technology considerations, and
competitive forces, which could
detrimentally impact the underlying
economics of a construction project.
Contractor risk can threaten the
financial viability of a construction
project if the contractor does not have
the requisite experience and expertise to
complete the project successfully.
Contractor inefficiencies or errors can
derail a project’s timeline or budget. The
financial capacity of the contractor is
also critical, especially in cases where
the contractor is responsible for any cost
overruns.
Contract risk is another key category
of risk in construction lending. One of
the most important contractual
agreements in a construction project is
the construction contract. While some
types of construction contracts shift the
responsibility of managing key aspects
of the project to a contractor, other
contracts can leave the borrower
exposed to such risks as fluctuations in
input costs and potential contract
disputes with sub-contractors.
Another key risk to construction
projects is environmental risk. Such risk
can arise when site assessments are not
properly conducted prior to
construction and unidentified
environmental issues such as
contamination later derail project
timelines or budgets, or even threaten
the viability of the project.
Contamination can also occur after
construction has already begun and
potentially involve expensive cleanup
costs. Beyond contamination, borrowers
also face other potential environmental
impacts of the project, including the
effects on native habitats for flora and
fauna where legal or regulatory
protections are in place.
FCA has recently seen certain System
institution-funded construction projects
particularly challenged due to some of
the risks discussed above. Specifically,
supply chain disruptions and labor
shortages have led to project delays and
cost overruns following the COVID–19
pandemic, recent geopolitical events,
and increased inflation. Inflationary
pressures continue to persist and have
impacted the costs of some rural
infrastructure projects.
Supply chain constraints and
disruptions in project financings across
different industries, including the
leasing sector, have in some cases
resulted in material increases in project
costs and construction delays. The
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impact to costs and schedules has
stemmed partly from the inadequate
supply of key components but also from
increased input costs. Such supply
chain issues could pose a credit risk to
System institutions if construction
timelines are materially impacted and
construction costs increase significantly
during the construction phase.
As discussed above, various risks
have continued to underscore
construction lending, some of which
have been more evident in recent years.
These risks threaten the ability for such
projects to be completed in a manner
that ensures adequate repayment to
lenders. As such, construction
exposures warrant the higher risk
weight proposed in this rule.
The FBRAs first recognized the higher
risk in construction lending in the
higher risk weights they adopted in
their capital regulations in 2013–2014.
FCA’s 2014 proposed HVCRE provisions
were very similar to those the FBRAs
had adopted. System commenters
expressed concern about parts of the
proposed HVCRE definition and asked
FCA not to adopt the definition. FCA
did not adopt the HVCRE provisions in
its capital rule in 2016, because it
wanted to further consider and analyze
HVCRE and the issues related to these
exposures. In the preamble to the final
capital rule in 2016, FCA said the
Agency expected to engage in additional
HVCRE rulemaking in the future.15
Beginning in 2017, the FBRAs issued
several proposed rules on HVCRE
exposures to address concerns with the
original definition.16 On May 24, 2018,
the President signed into law the
Economic Growth, Regulatory Relief,
and Consumer Protection Act
(EGRRCPA),17 adding a new statutory
definition that would have to be
satisfied for an exposure to be riskweighted 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.18
Recognizing the need to update
capital requirements to reflect the
increased risk characteristics that
exposures to HVCRE loans pose to
System institutions, and in accordance
with this rule’s objective to ensure
continued comparability to the Basel
guidelines and the FBRAs’ rules, on
August 26, 2021, FCA published in the
Federal Register a notice of proposed
15 81
FR 49719, 49736 (July 28, 2016).
staff submitted a comment letter in
response to one of the proposals that communicated
concerns with a proposed exemption for
agricultural land.
17 Public Law 115–174, 132 Stat. 1296 (2018).
18 84 FR 68019.
16 FCA
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rulemaking (proposed rule or proposal)
seeking public comment on
amendments to its capital rules to
define and establish a risk weight for
HVCRE exposures.19
II. Summary of the Proposed Rule,
Comments Received, and Final Rule
FCA’s proposed rule was similar to
the FBRAs’ rule in most respects, with
deviations as appropriate to
accommodate the different regulatory,
operational, and credit considerations of
the System. Notably, the proposed rule
contained provisions from the FBRAs’
final rule that addressed certain
concerns commenters raised in response
to the FCA’s 2014 proposed rule.
As discussed further below, FCA is
adopting a final definition of HVCRE
exposure with one modification from
the proposal based on comments
received. The Agency is also clarifying
in this preamble certain provisions of
the HVCRE rule.
FCA reminds System institutions that
this is a risk-weighting regulation only.
System scope and eligibility authorities
are contained in other provisions of
FCA’s regulations and in the Act.20
A. Summary of the Proposed Rule
Because of the increased risk
characteristics in HVCRE exposures,
FCA proposed, 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.21
B. Comments Received
In response to the HVCRE proposal,
FCA received 11 comment letters: One
letter from the Farm Credit Council
(FCC), with input from a System
workgroup, consisting of several System
institutions, that was established to
review the HVCRE proposal and other
related documents (System Comment
Letter); 22 one letter each from CoBank,
ACB (CoBank Letter),23 Farm Credit
Bank of Texas (FCBT Letter),24 and
AgriBank, FCB (AgriBank Letter),25 all
19 86 FR 47601 (August 26, 2021). The proposed
rule included a 90-day comment period. On
October 20, 2021, FCA published in the Federal
Register a notice extending the comment period for
an additional 60 days, until January 24, 2022.
20 As stated in the preamble to the capital rule
FCA adopted in 2016, ‘‘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).
21 FCA regulation § 628.32(f)(1).
22 System Comment Letter dated January 19,
2022.
23 CoBank Letter dated January 20, 2022.
24 FCBT Letter dated January 24, 2022.
25 AgriBank Letter dated January 24, 2022.
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of which are System banks; and letters
from seven System associations: Farm
Credit Mid-America, ACA,26 Farm
Credit of the Virginias, ACA,27
Northwest Farm Credit Services, ACA
(Northwest Letter),28 Capital Farm
Credit, ACA,29 Farm Credit West,30
ACA, Compeer Financial, ACA,31 and
Farm Credit of Florida, ACA.32 All
System bank and association
commenters supported the System
Comment Letter, and several included
identical language seeking clarification
on several provisions and requesting
further exclusions to the HVCRE
exposure definition. Furthermore, no
commenters supported any specific
provisions of the proposed rule, and
they all stated the burden of identifying
HVCRE loans on an ongoing basis
greatly exceeds the benefit of identifying
the minimal potential adverse impact
that such loans could have on the safety
and soundness of a System institution.
However, System commenters generally
supported FCA’s attempt to ensure
FCA’s capital rules are similar to those
adopted by the FBRAs with the guiding
principle that 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.
C. Discussion of Final Rule and
Responses to Comments
1. Scope of HVCRE Exposure Definition
FCA proposed to define an HVCRE
exposure as ‘‘a credit facility secured by
land or improved real property’’ that
met the three criteria discussed below
(and that did not meet any of the
definition’s exclusions, which are
discussed in Section II.C.2 of this
preamble—Exclusions From HVCRE
Exposure Definition).33 If a credit
facility secured by land or improved
real property did not meet all three
26 Farm Credit Mid-America, ACA Letter dated
January 26, 2022.
27 Farm Credit of the Virginias, ACA Letter dated
January 24, 2022.
28 Northwest Letter dated January 24, 2022.
Northwest Farm Credit Services, ACA merged with
Farm Credit West, ACA to form AgWest Farm
Credit, ACA, effective January 1, 2023.
29 Capital Farm Credit, ACA Letter dated January
21, 2022.
30 Farm Credit West, ACA Letter dated January
22, 2022. Farm Credit West, ACA merged with
Northwest Farm Credit Services, ACA to form
AgWest Farm Credit, ACA, effective January 1,
2023.
31 Compeer Financial, ACA Letter dated January
18, 2022.
32 Farm Credit of Florida, ACA Letter dated
January 21, 2022.
33 FCA regulation § 614.4240(q) defines ‘‘real
property’’ as ‘‘all interests, benefits, and rights
inherent in the ownership of real estate.’’
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criteria, it would not be an HVCRE
exposure.
The determination of whether a credit
facility is an HVCRE exposure is made
on new exposures only. New exposures
determined not to be HVCRE after initial
evaluation do not need to be evaluated
again as HVCRE exposures. New
exposures include loan originations,
modifications, and project alterations
that materially change 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).
Credit facilities that meet the
definition of HVCRE exposure after
initial evaluation may be reclassified as
non-HVCRE if they meet the criteria
discussed in Section II.C.3 of this
preamble—Reclassification as a NonHVCRE Exposure.
Under the proposed definition, a
credit facility is secured by land or
improved real property 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.34 For example, if an
institution made a loan to construct and
equip a building, and the loan was
secured by both the real estate and the
equipment, the institution would have
to estimate the value of the building,
upon completion, and of the equipment.
If the value of the building was greater
than 50 percent of the principal amount
of the loan at origination, the loan
would be a ‘‘credit facility secured by
land or improved real property.’’ 35 If
the value of the building, upon
completion, was less than 50 percent of
the principal amount of the loan at
origination, it would not be a ‘‘credit
facility secured by land or improved
real property.’’ Accordingly, it would
not be an HVCRE exposure.
As discussed above, a credit facility
that is secured by land or improved real
property would not be classified as an
HVCRE exposure under the proposed
rule unless it met three criteria. If such
a facility did not meet all three criteria,
it would not be an HVCRE exposure.
These criteria are discussed below.
34 This proposed definition is consistent with the
definition of ‘‘a loan secured by real estate’’ in the
FBRAs’ Call Report forms and instructions.
35 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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Description of Three Criteria of HVCRE
Definition
First, under paragraph (1)(i) of the
proposed HVCRE definition, the credit
facility must primarily finance, have
financed, or refinance the acquisition,
development, or construction of real
property. This criterion would be
satisfied if more than 50 percent of the
proposed use of the loan funds was for
the acquisition, development, or
construction of real property. The
criterion would not be satisfied if 50
percent or less of the proposed use of
the loan funds was for the acquisition,
development, or construction of real
property. In the case of revolver loans
that are secured by land or real
property, if more than 50 percent of the
proposed use of the revolver funds is for
acquisition, development, or
construction of real property, the entire
loan would satisfy this criterion and
potentially be subject to HVCRE
classification if it meets the other two
criteria and is not subject to an
exclusion.
Second, under paragraph (1)(ii) of the
proposed HVCRE definition, the
purpose of the credit facility must be to
provide financing to acquire, develop,
or improve such real property into
income-producing property.
Finally, under paragraph (1)(iii) of the
proposed HVCRE definition, the
repayment of the credit facility must
depend upon the future income or sales
proceeds from, or refinancing of, such
real property. The preamble to the
proposed rule explained that under this
criterion, credit facilities that would be
repaid from the borrower’s ongoing
business, as opposed to being repaid
from future income or sales proceeds
from the property, would not be
classified as an HVCRE exposure.
Comments on HVCRE Exposure
Definition and FCA’s Responses
FCA received various comments on
the proposed definition of HVCRE
exposures, including the three criteria.
On a broad level the Farm Credit
Council, supported by all System bank
and association commenters,
commented that the rulemaking was not
needed due to limited opportunity for
System institutions to make HVCRE
loans. They commented that the burden
in identifying these loans exceeds the
benefit of identifying the risk to safety
and soundness.36
36 CoBank Letter dated January 20, 2022, and
Farm Credit of Florida, ACA Letter, dated January
21, 2022, reiterated this comment verbatim while
Capital Farm Credit, ACA Letter, dated January 21,
2022, reiterated the comment in summary form.
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These comments are premised on a
misunderstanding of the definition of
HVCRE. Specifically, these comments
assert that the HVCRE risk weight ‘‘was
designed by the FBRAs to identify
commercial real estate loans of a
speculative nature (such as office
buildings and strip malls without signed
lessees).’’ 37
Contrary to the commenters’
assertion, the FBRAs’ definition
includes more than just speculative
commercial real estate loans. The plain
language of their definition includes all
credit facilities that are secured by land
or improved real property and that
satisfy the three criteria and are not
subject to an exclusion. None of the
criteria and exclusions limit the HVCRE
definition only to speculative
commercial real estate loans. The
HVCRE definition, including the three
criteria and considering the exclusions,
includes, for example, project finance
construction and construction of
facilities dependent on third-party
integrator agreements. System
institutions make loans of this nature,
and such loans satisfy this definition.
The System Comment Letter also
stated that there are better ways to
accomplish the Agency’s objectives.38
Two commenters referenced System
practices currently in place at System
institutions to control risk
concentrations in construction
exposures including risk-based
borrower ratings, concentration and
hold limits, and underwriting
standards.39 While the Agency
recognizes that System institutions can
mitigate their HVCRE risk exposures
through risk management practices,
regulatory risk weights ensure that a
minimum amount of capital is reserved
by all institutions. In the same way that
corporate exposures are generally riskweighted at 100 percent 40 and certain
past due and nonaccrual exposures are
risk-weighted at 150 percent 41 despite
variations in institutions’ credit
administration practices, HVCRE
exposures should all be subject to the
same risk weight, regardless of an
37 System Comment Letter dated January 19,
2022, page 2.
38 CoBank Letter dated January 20, 2022, and
Farm Credit of Florida, ACA Letter, dated January
21, 2022, reiterated this comment verbatim while
Capital Farm Credit, ACA Letter, dated January 21,
2022, reiterated the comment in summary form.
39 Farm Credit of the Virginias, ACA Letter dated
January 24, 2022, and Farm Credit West, ACA Letter
dated January 22, 2022.
40 § 628.32(f)(1).
41 FCA regulation § 628.32(k)(1) assigns a 150
percent risk weight to past due and nonaccrual
exposures, except sovereign or residential
exposures, that are not guaranteed or secured by
financial collateral.
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individual institution’s risk
management practices.
The System Comment Letter,
supported by all System bank and
association commenters, included
various questions and comments
regarding the proposed third criterion.42
The Letter requested clarification of the
terms ‘‘future income’’ and ‘‘income
from ongoing business’’; asked whether
‘‘income from ongoing business’’
includes any assets built and operated
by the business that developed the
property; asked the percentage of future
and ongoing income relied upon when
determining whether a property is
income-producing; and requested
consideration of the fact that repayment
can come from multiple sources.
Moreover, the letter requested an
explicit exclusion in the regulation for
credit facilities for which repayment
would be from the ongoing business of
the borrower as well as removal of
‘‘third-party rent or lease payments’’
from the proposed definition. Finally,
the letter included a request for FCA to
consider the impact of ‘‘third-party rent
or lease payments’’ on young,
beginning, or small (YBS) farmers who
may rely on third-party integrator
agreements to start themselves in
agriculture.43
In response to these comments, FCA
reiterates that the proposed third
criterion was that the credit facility is
‘‘dependent on future income or sales
proceeds from, or refinancing of,’’ the
property for repayment. The proposed
regulation did not refer to ‘‘income from
ongoing business.’’ The preamble to the
proposed rule discussed loan repayment
from ongoing business as an example of
a form of repayment that does not
satisfy the proposed third criterion
because it is not repayment from future
income or sales proceeds from the real
property.44 FCA confirms that if a credit
facility was dependent on any form of
repayment other than future income or
sales proceeds from, or the refinancing
of, the real property, including
repayment from income generated by
any assets within a borrower’s portfolio,
it would not satisfy this proposed
criterion and would therefore not be an
HVCRE exposure.
The System Comment Letter
specifically referenced assets built and
42 Farm Credit of Florida, ACA Letter, dated
January 21, 2022, reiterated the System Comment
Letter’s questions and comments verbatim.
43 Section 4.19 of the Act requires each System
association, under policies of and subject to review
and approval of its funding bank, to prepare a
program for furnishing sound and constructive
credit and related services to YBS farmers and
ranchers. This requirement is implemented by FCA
regulations at 12 CFR 614.4165.
44 86 FR 47601, 47603 (August 26, 2021).
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operated by the business that developed
the property. FCA clarifies that for the
purpose of HVCRE classification, the
cash flow of the borrower must be
analyzed, not that of the property
developer or some other entity other
than the borrower. Because this
preamble clarifies the plain language of
the third criterion, that credit facilities
for which repayment would be from the
ongoing business of the borrower are not
covered by that criterion and are not
HVCRE exposures, explicit regulatory
language to that effect is not needed.
In response to the question about the
percentage of future and ongoing
income relied upon when determining
whether a property is income-producing
and for consideration of the fact that
repayment can come from multiple
sources (both ongoing and future
income or sales proceeds), FCA retains
the proposed requirement that if any
part of the repayment on a credit facility
depends on future income or sales
proceeds, the credit facility satisfies the
proposed third criterion. FCA believes
specifying a percentage threshold for
future income other than zero to
determine HVCRE status would be
overly complicated and burdensome.
The Agency recognizes that repayment
of credit facilities may come from
multiple sources but, for the purpose of
HVCRE classification, if any repayment
depends on future income or sales
proceeds, the exposure would meet the
proposed third criterion of the
definition of HVCRE.
Regarding the System Comment
Letter’s request to remove ‘‘third-party
rent or lease payments’’ from the
proposed definition of HVCRE
exposure, FCA notes that terminology is
not actually included in the definition.
Rather, it is found in the preamble to the
proposed rule, in a discussion of
‘‘certain commercial real property
projects’’ that would qualify for
exclusion from HVCRE.45 As such, there
is no need to remove that term from the
definition of HVCRE. However, in
Section II.C.2.d of this preamble—
Certain Commercial Real Property
Projects—the reference to ‘‘third-party
rent or lease payments’’ that was in the
preamble to the proposed rule has been
replaced with a reference to ‘‘revenues
from future income.’’
As discussed above, credit facilities
where repayment would be from any
type of future income, including thirdparty rents or lease payments, were
included in the proposed definition of
HVCRE to reflect the risk of such
facilities. Excluding third-party rents or
lease payments, including third-party
45 86
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25121
integrator agreements, from the
definition of future income is not
warranted by the risk in those
exposures. There is further discussion
around exclusions for integrator
contracts in Section II.C.2.f.ii of this
preamble—Agricultural Production or
Processing Facilities with Contractual
Purchase Agreements in Place—
including the Agency’s consideration of
YBS farmers.
For the reasons stated above, FCA is
adopting as final, without change from
the proposal, the definition of HVCRE as
a credit facility secured by land or
improved real property. In addition, the
Agency is adopting, as proposed, the
three criteria outlined above. The
exclusions from the HVCRE definition,
as well as related comments and FCA’s
responses, will be discussed in the next
section of the preamble.
FCA’s final rule is similar to the
FBRAs’ rule in most respects, but it
differs in two general areas. The FBRAs’
rule clarified the interpretation of
certain terms generally to be consistent
with their usage in other FBRA
regulations or Call Report instructions.
The FCA did not propose different
interpretations of these terms, nor did
the Agency propose to refer to these
FBRA references. In addition, FCA
proposed some differences where
appropriate to accommodate the
different regulatory, operational, and
credit considerations of the System,
while continuing to maintain
appropriate safety and soundness.
FCA’s proposed definition of HVCRE
exposure was intended to capture only
those exposures that have increased risk
characteristics in the acquisition,
development, or construction of real
property.
2. Exclusions From HVCRE Exposure
Definition
Under FCA’s HVCRE proposal, like
the FBRA rule, four broad types of
exposures were excluded from the
definition of HVCRE exposure. These
types of exposures are discussed in the
following sections.
a. One- to Four-Family Residential
Properties
Under paragraph (2)(i)(A) of FCA’s
proposed HVCRE definition, as in a
similar provision of the FBRA rule, an
HVCRE exposure did 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) represented at least 50
percent of the total appraised value of
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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
proposed exclusion, as would
construction loans secured by single
family dwelling units, duplex units, and
townhouses. Condominium and
cooperative construction loans would
qualify for this proposed exclusion,
even if the loan was financing the
construction of a building with five or
more dwelling units, if the repayment of
the loan came from the sale of
individual condominium dwelling units
or individual cooperative housing units.
This proposed exclusion would apply
to all credit facilities that fall within its
scope, whether rural home financing
under § 613.3030 or one- to four-family
residential property financing under
§ 613.3000(b). Similar to the reduced
risk weight assigned to residential
mortgage exposures under
§ 628.32(g)(1), a credit facility would
qualify for this proposed exclusion only
if the property securing the credit
facility exhibited 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 proposed
exclusion.
Loans for multifamily residential
property construction (such as
apartment buildings where loan
repayment is dependent upon
apartment rental income) would not
qualify for this proposed exclusion.46
Loans used solely to acquire
undeveloped land for the purpose of
constructing one- to four-family
residential structures would not qualify
for this proposed 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 fourfamily 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
46 Certain multifamily residential property may
meet the ‘‘other credit needs’’ financing available to
eligible borrowers as authorized by sections
1.11(a)(1) and 2.4(a)(1) of the Act and referenced in
§ 613.3000(b).
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qualify for this proposed exclusion. A
credit facility that combines the
financing of land development and the
construction of one- to four-family
structures would qualify for this
proposed exclusion.
FCA did not receive any comments on
this proposed exclusion and is adopting
the exclusion as proposed.
b. Agricultural Land
Under paragraph (2)(i)(C) of its
proposed HVCRE definition, FCA
proposed to exclude credit facilities
financing ‘‘agricultural land,’’ as defined
in FCA regulation § 619.9025, or real
estate used as an integral part of an
aquatic operation. FCA regulation
§ 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.’’
The proposed exclusion applied only
to financing for the agricultural and
aquatic needs of bona fide farmers,
ranchers, and producers and harvesters
of aquatic products under § 613.3000 of
FCA regulations. It did not apply to
loans for farm property construction or
land development purposes.
FCA intended its 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.47
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 ‘‘farmland’’ loans, and
therefore such loans do not fall within
the FBRAs’ agricultural land exclusion.
Unlike the FBRAs, FCA proposed to
expressly include within the
agricultural land exclusion real estate
that is an integral part of an aquatic
operation.
As in the FBRAs’ final rule, loans for
land development purposes and farm
property construction would not have
been eligible in FCA’s proposed rule for
the agricultural land exclusion. Loans
made for land development purposes
would include loans made to finance
property improvements, such as laying
sewers or water pipes preparatory to
47 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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erecting new structures. Loans made for
farm property construction would
include loans made to finance the onsite 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.
Exposures to land in transition—
agricultural land in the path of
development—were not automatically
excluded from the definition of HVCRE
through the proposed agricultural land
exclusion. These exposures would need
to be evaluated against the three criteria
of the HVCRE definition discussed in
Section II.C.1 of this preamble—Scope
of HVCRE Exposure Definition—as well
as all exclusions discussed in this
preamble, to determine whether they are
HVCRE exposures.
FCA received several comments
related to the proposed agricultural land
exclusion. The System Comment Letter,
and several other comment letters,48
highlighted the section of the proposed
rule preamble that explained the
exclusion would not apply to loans for
farm property construction, including
farm buildings. They stated that not
applying the exclusion to the
construction of farm buildings was
contradictory to the underlying premise
of the agricultural land exclusion and
did not recognize the lower risk of these
types of ‘‘on-farm facilities.’’ 49 The
letter requested that FCA add ‘‘not
related to on-going farming operations’’
after the term ‘‘farm buildings,’’
indicating that the interdependent
nature of System loan packages and the
fact that farm construction projects are
often related to ongoing farming
operations reduces the risk of such
projects.50
As discussed above, the scope of
FCA’s proposed agricultural land
exclusion was similar to that of the
FBRAs’ (except that FCA’s proposed
exclusion added exposures to real estate
that is an integral part of an aquatic
operation). The FBRAs’ exclusion
includes exposures to ‘‘farmland’’ only
and does not include loans for farm
property construction. Therefore, the
commenters’ statement that not
applying the exclusion to the
48 FCBT Letter dated January 24, 2022, Farm
Credit of the Virginias, ACA Letter dated January
24, 2022, Capital Farm Credit, ACA Letter dated
January 21, 2022, Farm Credit West, ACA Letter
dated January 22, 2022 and Farm Credit of Florida,
ACA Letter dated January 21, 2022.
49 System Comment Letter dated January 19,
2022, page 3.
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construction of farm buildings is
contradictory to the underlying premise
of the agricultural land exclusion is not
correct.
In response to the commenters’
request that FCA expand the scope of
the proposed exclusion to include the
construction of farm buildings related to
ongoing farming operations, FCA notes,
as discussed in Section II.C.1 of this
preamble—Scope of HVCRE Exposure
Definition, that farm building
construction projects where repayment
of the credit facility will be from
ongoing farming operations do not meet
the third criterion of the proposed
HVCRE definition and would not be
subject to the increased risk weight. The
third criterion is that repayment of the
credit facility is dependent on the future
income or sales proceeds, or refinancing
of, the real property.50 This riskweighting treatment reflects the lower
relative risk characteristics of these
exposures.
On the other hand, farm construction
projects where repayment will depend
on future income or the sales proceeds
from the real property would meet the
third criterion of the proposed HVCRE
definition. Such projects have increased
risk characteristics, justifying a higher
risk weight compared to projects with
repayment from ongoing operations.
They would be assigned a higher risk
weight under the FBRAs’ rules and
would be assigned a higher risk weight
under FCA’s proposed rule as well.
In discussing the proposed
Agricultural Land exclusion, the System
Comment Letter, as well as two other
letters,51 requested that FCA consider
potential obstacles for YBS borrower
entry into agriculture. These
commenters stated that farm
construction projects by YBS borrowers
are often not part of ongoing farming
operations and would potentially have
higher costs of credit if subject to the
150 percent HVCRE risk weight. FCA
believes excluding all YBS borrowers
from the HVCRE risk weight would
present safety and soundness concerns
and detract from the objectives of this
rule. However, as discussed in Section
II.C.2.e of this preamble—Loans
Originated for Less Than $500,000—the
final rule includes an HVCRE exclusion
for loans originated under $500,000,
50 As discussed in Section II.C.1 of this
preamble—Scope of HVCRE Exposure Definition—
in the case of revolver loans secured by land or real
property where more than 50 percent of the
proposed use of the revolver funds is for
acquisition, development, or construction of real
property, the entire revolver would be subject to the
HVCRE definition if it also meets the other two
criteria and is not subject to an exclusion.
51 FCBT Letter dated January 24, 2022, and Farm
Credit of Florida Letter dated January 21, 2022.
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which will benefit some YBS
borrowers.52
For the reasons stated above, FCA is
adopting as final, without change from
the proposal, the agricultural land
exclusion.
c. Loans on Existing Income Producing
Properties That Qualify as Permanent
Financings
As in the FBRA rule, FCA proposed,
in paragraph (2)(ii) of its definition of
HVCRE exposure, to exclude 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. FCA also proposed, in
part (2)(iii) of its definition of HVCRE,
to exclude credit facilities financing
improvements to existing incomeproducing real property secured by a
mortgage on such property. The
preamble to the proposed rule noted
that examiners may review the
reasonableness of a System institution’s
underwriting standards for permanent
loans through the regular examination
process to ensure the real estate lending
policies are consistent with safe and
sound banking practices.
Under the proposal, loans such as
agribusiness or rural project financing
transactions, among other types of
loans, could qualify for the incomeproducing 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.
Loans that are not secured by existing
income-producing real property,
however, would not fall under this
proposed exclusion. Such loans often
pose a greater credit risk than
permanent loans. FCA believes it is
appropriate to classify these loans as
HVCRE exposures and impose a 150
percent risk weight given their
increased risk characteristics compared
to other commercial real estate
exposures (unless the loan satisfies one
of the other exclusions). However, as
discussed in Section II.C.3 of this
preamble—Reclassification as a NonHVCRE Exposure, the proposal would
allow a System institution to reclassify
these HVCRE exposures as non-HVCRE
52 Page 30 of the 2022 Annual Report of the Farm
Credit Administration shows that for all three
categories of YBS loans, the average size of loans
outstanding as of December 31, 2022, and of loans
made in 2022 was less than $500,000.
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exposures if they satisfied the two
conditions in paragraph (6) of the
proposed rule.
FCA received one comment on the
proposed exclusion for existing income
producing properties that qualify as
permanent financings. The System
Comment Letter referenced a ‘‘cash flow
‘test’ ’’ to determine the sufficiency of
the cash flow generated by real property
to support the debt service and
expenses.53 The Letter requested the test
be conducted only once at loan
origination and not be required again
assuming the loan continues to pay as
agreed. While neither the preamble to
the proposed rule nor the rule text itself
explicitly referenced a cash flow ‘‘test’’,
FCA interprets the comment as
reference to the underwriting analysis
performed in determining whether a
loan qualifies for this exclusion. The
Agency is clarifying that once a loan has
undergone this analysis at origination or
purchase for the purpose of HVCRE
classification, the institution does not
need to reassess the loan again for that
purpose. However, as with any
permanent financing, the institution
must have procedures in place for
monitoring the ongoing quality of the
loan. These procedures could include
ongoing loan analysis.54
For the reasons stated above, FCA is
adopting as final, without change from
the proposal, the exclusion for loans on
existing income producing properties
that qualify as permanent financings.
d. Certain Commercial Real Property
Projects
As in the FBRA rule, FCA proposed,
in paragraph (2)(iv) of its HVCRE
definition, 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 future
income. Commercial real property
project loans do not include ordinary
business loans and lines of credit in
which real property is taken as
53 System Comment Letter dated January 19,
2022, page 3.
54 FCA regulation § 614.4170 outlines the
responsibilities of direct lenders to service the loans
they make, including having policies and
procedures in place to preserve the quality of sound
loans and help correct deficiencies as they develop.
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collateral. As it relates to the System,
FCA believes this proposed exclusion is
most relevant to agribusiness
(processing and marketing entities and
farm-related businesses) and rural
project financing.
To qualify for this proposed
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
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.
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i. 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.55 These
Interagency Guidelines require banking
institutions, for real estate loans, to
establish internal LTV limits that do not
exceed specified supervisory limits
ranging from 65 percent for raw land to
85 percent for 1- to 4-family residential
and improved property.
The FCA has not adopted these
supervisory LTV limits.56 Nevertheless,
FCA examination guidance from 2009
makes clear that FCA expectations are
consistent with the Interagency
Guidelines, including the supervisory
LTV limits.57 FCA believes exposures
55 See 12 CFR part 365, subpart A, Appendix A
(FDIC); 12 CFR part 208, Appendix C (FRB); 12 CFR
part 34, Appendix A (OCC).
56 Section 1.10(a) of the Act and § 614.4200(b)(1)
of FCA regulations require at least an 85 percent
LTV ratio for long-term real estate mortgage loans
that are comprised primarily of agricultural or rural
property, except for loans that have government
guarantees or are covered by private mortgage
insurance. Under § 614.4200(b)(1), agricultural or
rural property includes agricultural land and
improvements thereto, a farm-related business, a
marketing or processing operation, a rural
residence, or real estate used as an integral part of
an aquatic operation.
57 Examination Bulletin FCA 2009–2, Guidance
for Evaluating the Safety and Soundness of FCS
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should satisfy these LTV limits to
qualify for this proposed exclusion to
the HVCRE definition. In paragraph
(2)(iv)(A) of the final rule, the Agency
proposed to adopt these LTV limits, for
the purpose of the HVCRE definition
only, in a new Appendix A to part 628.
The System Comment Letter
requested that FCA consider the
potential impact of these proposed LTV
limits on YBS lending. For the reasons
discussed above, FCA is not providing
an exclusion for all YBS borrowers.
However, the final rule includes an
HVCRE exclusion for loans originated
under $500,000, which will benefit
some YBS borrowers.
For the reasons stated above, FCA is
adopting as final this provision of the
proposed rule.
ii. Contributed Capital
Under paragraph (2)(iv)(B) and (C) of
FCA’s proposed definition of HVCRE
exposures, borrowers must contribute
capital of at least 15 percent of the real
property’s value to the project to qualify
for the commercial real property
projects exclusion. 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-ofpocket development expenses paid by
the borrower.
FCA’s proposed rule required the
value of contributed property to be
determined in accordance with FCA
regulations at Part 614, Subpart F,
which are generally similar to the
FIRREA standards adopted in the FBRA
rule.58 Under the proposed rule, 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. In addition, the preamble to
the proposed rule explained that
Real Estate Lending (focusing on land in transition),
December 2009.
58 See FCA Informational Memorandum,
Guidance on Addressing Personal and Intangible
Property within Collateral Evaluation Policies and
Procedures (§ 614.4245), August 29, 2016. On May
20, 2021, FCA issued a proposed rule on collateral
evaluation requirements (86 FR 27308). FCA’s Fall
2023 Unified Agenda and Review of Significant
Regulatory Actions, which the FCA Board approved
on August 14, 2023, indicates that the agency will
be considering a reproposed rule on collateral
evaluation requirements in July 2024. Depending on
the eventual outcome of the rulemaking, FCA’s
collateral standards could deviate from the FIRREA
standards in the future.
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contributed property or improvements
would have to be ‘‘directly related’’ to
the project to be eligible to count
towards the capital contribution. As
explained in that preamble, under the
proposed rule real estate not developed
as part of the project would not be
counted toward the capital contribution.
FCA received various comments on the
contributed capital requirement of the
proposed rulemaking which are
addressed below.
Cross-Collateralized Real Property and
‘‘Directly Related’’ Collateral
The System Comment Letter included
a request for FCA to permit crosscollateralized real property or
improvements to qualify as part of the
capital contribution to an HVCRE
project.59 The Letter referenced the
common practice of System institutions
cross-collateralizing real estate
collateral, and particularly the practice
of a related party contributing collateral
to support a loan to a YBS farmer so the
farmer can obtain financing. The Letter
explained that while the collateral
might not be ‘‘directly related’’ to the
project being financed, the collateral is
pledged agricultural land integral to a
borrower’s overall operation and does
not have the same risk profile as
‘‘unrelated commercial development
real estate projects.’’ 60
In response to this comment, the
Agency is confirming that crosscollateralized property is permitted to
count as a capital contribution to an
HVCRE project. As explained in the
preamble to the proposed rule, the value
of the contributed real property must be
reduced by the aggregate amount of any
outstanding liens on the property for the
purpose of calculating the 15 percent
capital contribution.
In addition, the Agency has
reconsidered its regulatory
interpretation in the preamble to the
proposed rule that contributed real
property or improvements must be
‘‘directly related’’ to the project. Under
the final rule, other real property
contributed to a project does not have to
be ‘‘directly related’’ to the project to
count as capital contributions for the
purpose of the commercial real property
projects exclusion.
In not requiring real property to be
‘‘directly related’’ to a project to count
towards the 15 percent capital
59 The Farm Credit West, ACA Letter dated
January 22, 2022, reiterated this comment. The
CoBank Letter, dated January 20, 2021, asked for
clarification on whether YBS loans, which often
cross-collateralize, would be exempted from the
HVCRE definition.
60 System Comment Letter dated January 19,
2022, page 4.
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contribution for the purposes of
excluding a project from the HVCRE
definition, FCA is deviating from the
FBRAs’ interpretation of their final rule.
After careful consideration, FCA does
not believe that the relation of real
property to a project materially impacts
the risk associated with accessing
System collateral. Requiring real
property to be ‘‘directly related’’ to the
project is therefore not a necessary
safety and soundness criterion.
Readily Marketable Assets
In line with the Interagency
Guidelines for Real Estate Lending
Policies,61 FCA, in its proposed rule,
interpreted the term ‘‘unencumbered
readily marketable assets’’ to mean
insured deposits, financial instruments,
and bullion in which the System
institution has a perfected interest. For
assets 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.62
The System Comment Letter asked
FCA to clarify how often and to what
extent institutions need to document
that assets are readily marketable.63 For
the purpose of qualifying as contributed
capital for an HVCRE project, the assets
must be deemed readily marketable at
the time of loan origination only. The
assessment to determine whether an
asset is readily marketable should
address the depth, breadth, and
liquidity of the respective markets as
well as other liquidity risk indicators.
Abundance of Caution Collateral
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The System Comment letter also
requested that FCA ‘‘make a distinction
on real estate collateral taken as
abundance of caution for purposes of
the 15% capital contribution
requirement’’.64 FCA regulation
§ 614.4240(a) defines abundance of
caution, when used to describe
decisions to require collateral, as
circumstances in which collateral is
taken when (1) it is not required by
61 See 12 CFR part 365, subpart A, Appendix A
(FDIC); 12 CFR part 208, Appendix C (FRB); 12 CFR
part 34, Appendix A (OCC).
62 This interpretation is consistent with the
definitions of ‘‘unencumbered’’ and ‘‘marketable’’
in FCA’s liquidity regulation at § 615.5134.
63 The Farm Credit West, ACA Letter dated
January 22, 2022, reiterated this comment verbatim.
64 System Comment Letter dated January 19,
2022, page 4.
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statute, regulation, or institution policy,
and (2) the extension of credit could
have been made without taking the
collateral.
Borrowers must make a 15 percent
capital contribution that meets the
criteria outlined in paragraph (2)(iv)(B)
of this final rule, among other
requirements, for their loan to qualify
for this exclusion from the HVCRE
definition. As discussed above, such
collateral can be cross-collateralized and
does not have to be ‘‘directly related’’ to
the project. Any collateral used to meet
this requirement must satisfy the
specified criteria, including collateral
taken from the borrower in an
abundance of caution.
YBS Borrowers
The Agency considered the impact of
the contributed capital requirements on
YBS borrowers and, for the reasons
discussed above, is not providing an
exclusion for all YBS borrowers.
However, the final rule includes an
HVCRE exclusion for loans originated
under $500,000, which will benefit
some YBS borrowers.
For the reasons stated above, FCA is
adopting, as final, this provision of the
proposed rule.
iii. Value Appraisal
Under paragraph (2)(iv)(B) of FCA’s
proposed definition of HVCRE
exposures, 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, when an
‘‘as completed’’ value appraisal is not
available FCA proposed to permit the
use of an ‘‘as is’’ appraisal.65 In
addition, in its proposed rule FCA
proposed to allow the use of a collateral
evaluation of the real property in
situations when the Agency’s appraisal
regulations 66 permit collateral
evaluations to be used in lieu of
appraisals. As explained in the
proposed rule preamble, FCA’s
approach to real property valuation
deviates from the FBRAs’ regulatory
65 FCA intends 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.
66 See § 614.4260(c), which sets forth the types of
real estate-related transactions that do not require
appraisals.
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25125
language but is consistent with their
interpretation of the regulation.
FCA did not receive any comments on
this provision of the proposed rule and,
as such, is adopting it as proposed.
iv. Project
Under paragraph (2)(iv)(B) of FCA’s
proposed definition of HVCRE
exposures, the 15 percent capital
contribution and the appraisal or
collateral evaluation would be measured
in relation to a ‘‘project.’’ As discussed
in the proposed rule preamble, FCA
expects 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.
FCA did not receive any comments on
this provision of the proposed rule and,
as such, is adopting it as proposed.
e. Loans Originated for Less Than
$500,000
FCA is adding an HVCRE exclusion to
paragraph (2)(v) of the final rule for
loans originated for less than $500,000.
FCA recognizes the potential
administrative burden of tracking loans
of this size. As reported in the System’s
Annual Information Statement as of
December 30, 2022, 85 percent of
System borrowers had at least one loan
under $500,000,67 for the purpose of
HVCRE classification. This exclusion
maintains a balance between providing
regulatory relief to System institutions
and limiting the potential risk from
HVCRE exposures.
The System Comment Letter asked
FCA for consideration of YBS borrowers
in the final rule. The Letter asserted that
the loans of YBS applicants may be
defined as HVCRE due to their reliance
on third-party agreements for repayment
and the fact that they are often not part
of ongoing farming operations, and it
stated that this classification could be
an obstacle for YBS borrowers obtaining
financing. The Letter also asked FCA to
consider the impact of the LTV limits
and capital contribution requirements in
the commercial real property projects
exclusion on YBS borrowers.
FCA is committed to supporting the
FCS’s mission to serve YBS borrowers
but the Agency must also ensure the
67 Page 57 of the 2022 Annual Information
Statement of the Farm Credit System shows loans
under $500,000 account for 85 percent of System
borrowers and 16 percent of System loan volume
at December 31, 2022.
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safety and soundness of the System. The
addition of an exclusion for loans under
$500,000 will benefit some YBS
borrowers.68 In addition, many YBS
borrowers and System borrowers in
general will continue to have access to
loan guarantees through programs such
as the Farm Service Agency guarantee
programs. The guaranteed portion of
these loans will continue to receive a
reduced risk weight in accordance with
FCA’s capital rules and will not be
subject to the 150 percent risk weight
for HVCRE exposures.69
For the reasons discussed above, FCA
is adding an exclusion for loans
originated for less than $500,000 to the
HVCRE definition.
f. Consideration of Additional
Exclusions
As detailed below, the System
Comment Letter, as well as several other
comment letters, asked FCA to consider
various additional exclusions from the
HVCRE definition.70 The requested
exclusions included project financing of
public and private facilities; agricultural
production or processing facilities with
contractual purchase agreements in
place; minor improvements or
alterations to real property; credit
facilities where repayment would come
from the borrower’s ongoing business;
and de minimis levels of financing. FCA
considered each of these requested
exclusions as discussed below.
i. Project Financing of Public and
Private Facilities
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The System Comment Letter
(supported by the Northwest Letter), the
CoBank Letter, and the FCBT Letter
requested an exclusion from the HVCRE
definition for project financing of public
and private facilities, such as rural
infrastructure projects, where
contractual agreements to purchase the
product produced are in place before a
facility is constructed. Commenters
expressed concern that the proposed
HVCRE definition would include
System project financing, and therefore
68 Page 30 of the 2022 Annual Report of the Farm
Credit Administration shows that for all three
categories of YBS loans, the average size of loans
outstanding as of December 31, 2022, and of loans
made in 2022 was less than $500,000.
69 Under § 628.32(a)(1)(i)(B) the portion of an
exposure that is directly and unconditionally
guaranteed by the U.S. Government, its central
bank, or a U.S. Government agency is risk-weighted
at 0-percent. Under 628.32(a)(1)(ii) the portion of an
exposure that is conditionally guaranteed by the
U.S. Government, its central bank, or a U.S.
Government agency is risk-weighted at 20-percent.
70 The Northwest Letter, dated January 24, 2022,
encouraged FCA, without discussion, to consider
all five exceptions proposed in the System
Comment Letter.
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impact the financing of crucial rural
infrastructure projects.
The commenters stated that these
projects may not have the necessary
collateral support required by the
proposed rule but highlighted mitigating
factors against risk: the credit evaluation
of a project independent of the sponsor,
focus on the creditworthiness of
counterparties to the contractual
agreements, and the bankruptcy
remoteness of the projects from their
sponsors.71 They differentiated System
project financings from other forms of
corporate financing in which lenders
evaluate the financial condition of
corporate entities, not individual
projects. In addition, they stated that the
FBRAs’ intent with the HVCRE risk
weight was to capture speculative
commercial real estate loans.
As an initial matter, FCA notes that
FCA Bookletter-070—Revised Capital
Treatment for Certain Water and
Wastewater Exposures—and Bookletter053—Revised Regulatory Capital
Treatment for Certain Electric
Cooperatives—assign reduced risk
weights to certain project financing
exposures, including some exposures in
the construction phase.72 Specifically,
Bookletter-070 assigns a reduced risk
weight to certain rural water and
wastewater (RWW) construction
exposures.73 Bookletter-053 assigns a
reduced risk weight to certain electric
cooperative construction loans for new
baseload power plants. This rule will
not affect the reduced risk weights for
the project finance construction
exposures that these bookletters assign,
even for exposures that are HVCRE
exposures.
In response to the comments
regarding the standalone nature of
System project financings, FCA agrees
that this characteristic can be a risk
mitigant to such projects in isolating
them from any financial difficulties of
their sponsors. However, the Agency
also believes that the limited recourse to
project sponsors could be to the
detriment of such financings. If the
project were to default, the lender could
be limited to accessing the project’s
collateral, and any contributed capital,
alone. They may not have any recourse
to the project sponsor’s assets. More
importantly, project finance loans in the
71 FCA understands the commenters are referring
to projects that are structured to be legally separate
from the sponsor and not liable for the sponsors’
debts in bankruptcy.
72 The reduced risk weights are lower than those
that would otherwise apply under FCA regulation
§ 628.32.
73 In Section II.C.3. of this preamble—
Reclassification as a Non-HVCRE Exposure—FCA
explains revisions it plans to make to BL–070 before
this HVCRE rule becomes effective.
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construction phase share many of the
same risks as other construction loans
regardless of recourse to project
sponsors. These risks are discussed later
in this section. FCA does not therefore
believe that the independent nature of
such financings is a sound enough
reason alone to exclude these projects
from the HVCRE definition. As
discussed in Section II.C.3 of this
preamble—Reclassification as a NonHVCRE Exposure—the HVCRE risk
weight no longer applies once the
project is reclassified as non-HVCRE.
The System Comment Letter also
referenced the focus on the
creditworthiness of contractual
agreement counterparties as another risk
mitigant to project financings. FCA
agrees the creditworthiness of
counterparties to the contractual
agreements entered into by public and
private projects is key to mitigating the
risks of these projects. However, if a
project depends on a counterparty’s
contractual payments to repay its
construction phase debt, the inability of
the counterparty to meet its obligations
increases the risk that the project’s loan
will default. Counterparty credit risk
cannot be avoided and can translate to
elevated risk for construction loan
projects heavily reliant on
counterparties for repayment.
FCA believes there are other risk
factors to consider in relation to public
and private facility project financing
that justify inclusion of these credits in
the HVCRE definition. In addition to the
counterparty credit risk mentioned
above, some additional risks include
project delays, cost overruns, project
obsolescence, contractor risk, and risks
from shifting market dynamics.
As discussed in Section II.C.1 of this
preamble—Scope of HVCRE Exposure
Definition—project delays and cost
overruns have been a particular
challenge to System construction loans
recently, including in the project
financing sector, and the impact in some
cases has been material. If construction
timelines and costs continue to be
adversely affected, such supply chain
issues could pose a credit risk to System
institutions. The comment letters did
not address these risks.
Further, the reduced risk weights that
Bookletter-070 and Bookletter-053
assign to RWW and electric cooperative
construction exposures, as discussed
above, do not support exempting all
project finance construction exposures
from HVCRE exposure risk weighting.
The reduced risk weights for RWW and
electric cooperative exposures,
including exposures during the
construction phase, are supported by
unique characteristics of those
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exposures that may not exist with other
project finance exposures.
As Bookletter-070 notes, RWW plays
a critical role in agricultural and rural
America, but its infrastructure is aging,
and it can be difficult for rural
communities to finance improvements.
The services provided by RWW
facilities are essential, which
contributes to the overall strength and
stability of the industry. Moreover,
many RWW facilities are able to adjust
rates as needed to support repayment,
thus reducing the likelihood of default.
FCA determined that a reduced risk
weight for exposures that satisfied
specified quantitative and qualitative
safety and soundness criteria would
provide more capacity for System
institutions to provide RWW funding
without taking on excessive risk.
Similarly, the reduced risk weight for
electric cooperatives that satisfy criteria
specified in Bookletter-053 was
supported by the unique characteristics
and lower risk profile of the industry
segment. The reduced risk weights
assigned by bookletter to RWW and
electric cooperative construction
exposures do not support excluding
project finance construction generally
from the HVCRE risk weight.
For the reasons stated above, FCA is
not including a general exclusion for
project financing in the final HVCRE
rule. However, as discussed in Section
II.5 of this preamble—Impact on Prior
FCA Board Actions—certain project
financing loans will not be subject to the
HVCRE risk-weight under the
provisions of Bookletter-053 and a
revised Bookletter-070.
ii. Agricultural Production or Processing
Facilities With Contractual Purchase
Agreements in Place
The System Comment Letter
(supported by the Northwest Letter)
asked for an explicit exclusion from the
HVCRE definition for agricultural or
processing facilities where contractual
agreements are in place, prior to
construction of the facility, to purchase
the output from these facilities. The
System Comment Letter specifically
referenced ‘‘loans to finance
construction of poultry or other
livestock barns that are originated with
an integrator contract to support the
lending structure.’’ 74 Poultry and other
livestock facility construction projects
are subject to the same risks as any
construction project, namely project
74 System Comment Letter dated January 19,
2022, page 5. The FCBT Letter dated January 24,
2022, reiterated the System Comment Letter’s
comment verbatim. The CoBank Letter, dated
January 20, 2021, summarized this comment, asking
for clarification.
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cost overruns and time delays. These
risks are discussed in Section I.B.3 of
this preamble—ADC Lending Risk and
HVCRE Risk Weight. The commenters
did not provide a risk-based
justification, or any other justification,
for excluding these types of loans from
the HVCRE definition, and FCA does
not believe such a justification exists.
The System Comment Letter did ask
FCA to consider the potential impact on
YBS borrowers by not providing an
exclusion for loans with third-party
integrator agreements. As explained in
Section II.C.1 of this preamble—Scope
of HVCRE Exposure Definition—a
borrower dependent on payments from
an integrator for repayment of debt
would meet the criteria for classification
as an HVCRE exposure unless the loan
qualifies for an HVCRE exclusion. As a
reminder, if repayment of the poultry or
other livestock construction loan comes
from the ongoing business of the
borrower, the loan would not meet the
HVCRE criteria. As discussed above,
FCA is not providing an exclusion for
all YBS borrowers. However, some YBS
and other borrowers dependent on
integrator agreements for loan
repayment will benefit from the
exclusion of loans under $500,000 from
the definition of HVCRE in the final
rule. In addition, YBS loans may have
access to loan guarantees to reduce risk
weights.
For the reasons stated above, FCA is
not adopting an HVCRE exclusion for
agricultural or processing facilities
where contractual agreements are in
place.
iii. Minor Improvements or Alterations
to Real Property
The System Comment Letter
(supported by the Northwest Letter)
stated that FCA’s proposed HVCRE
definition included construction loans
for ‘‘additions or alterations’’ regardless
of materiality and requested an
exclusion for minor improvements or
alterations to real property.75 The letter
indicated that unless a minor
improvement request was a
modification to an existing permanent
financing it would be classified as
HVCRE.
As an initial matter, the Letter’s
suggestion that if a minor improvement
request is a modification to an existing
permanent financing it would not be
classified as an HVCRE exposure is not
necessarily correct. As the preamble to
the proposed rule explains, when a
System institution modifies a loan or if
75 The Farm Credit of Florida, ACA Letter, dated
January 21, 2022, repeated the System Comment
Letter’s comment verbatim.
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25127
a project is altered in a manner that
materially 76 changes the underwriting
of a credit facility, the institution must
treat the loan as a new exposure and
must evaluate it to determine whether
or not it is an HVCRE exposure.77
In response to the request for an
exclusion for minor improvements or
alterations to real property, the Agency’s
exclusion for loans under $500,000 will
provide relief for these types of
financings. In addition, the final
rulemaking does have an exclusion for
improvements to existing income
producing improved real property if the
cash flow generated by the property is
sufficient to support the debt service
and expenses of the real property in line
with permanent financing criteria.
Unless the loan to make minor
improvements or alterations will be
repaid from future income or sale of the
project’s real property, it would not fall
under the definition of HVCRE.
For the reasons stated above, FCA is
not adopting an HVCRE exclusion for
minor improvements or alterations to
real property.
iv. Credit Facilities Where Repayment
Would Be From the Ongoing Business of
the Borrower
The System Comment Letter
(supported by the Northwest Letter)
requested an explicit exclusion for
credit facilities where repayment would
come from the borrower’s ongoing
business.78 An explicit exclusion for
these credit facilities is not warranted,
because such an exclusion is clear from
the existing regulatory language.
The definition of HVCRE in the
proposed rule includes a criterion that
credit facilities where repayment is
dependent on future income or the sale
of the real estate would be considered
HVCRE. Implicit in this criterion is that
repayment from the ongoing business of
the borrower would exclude a credit
facility from being classified as HVCRE.
In addition, in the preamble to the
proposed rule, FCA explicitly stated
that credit facilities that will be repaid
from the borrower’s ongoing business
would not be classified as HVCRE.79
FCA does not believe changing the final
rule to incorporate an explicit exclusion
is warranted. Instead, FCA reiterates
that a credit facility for which ongoing
76 Material changes may include 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.
77 86 FR 47601, 47606 (August 26, 2021).
78 The Farm Credit West, ACA Letter dated
January 22, 2022 reiterated this comment verbatim.
79 86 FR 47601, 47606 (August 26, 2021).
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reclassification.’’ 81 In addition, the
letter requested further guidance on
how to calculate projected cash flows
for a property ‘‘owned by the business’’
when these are not ‘‘separately provided
by the borrower’’.82
As stated in the proposed rule,
institutions
should defer to their loan
v. De Minimis Financings
underwriting criteria for permanent
The System Comment Letter
financings when determining if an
(supported by the Northwest Letter)
HVCRE exposure is generating sufficient
asked FCA to consider an exclusion for
cash flow to support the debt service
a de minimis level of financing
and expenses of the real property. FCA
determined by each institution as a
does not have an expectation for a
percentage of risk funds.80 The final rule specific period following project
includes an exclusion for loans under
completion to demonstrate adequate
$500,000, which as discussed in Section cash flows. Such a criterion should be
II.C.2.e of this preamble—Loans
clearly stated in an institution’s loan
Originated for Less Than $500,000—will underwriting standards. Similarly, the
provide administrative relief without
Agency is not specifying in the final
introducing material risk exposure to
rule how to calculate cash flows.
the System. The Agency believes
Regardless of how cash flow
establishing a de minimis level as a
information is presented by a borrower,
percentage of capital or some other
the institution should have processes in
similar metric would allow for higher
place to adequately analyze and project
potential risk exposure than a dollar
cash flows.
threshold would. Large institutions with
FCA is adopting this part of the
considerable capital, for example,
proposed rule without change.
would be able to amass potentially
material amounts of HVCRE volume if a 4. Applicability Only to Loans Made
After January 1, 2025
capital-based threshold was set. The
$500,000 exclusion would apply to all
In consideration of the changes this
loans under $500,000 regardless of an
rule would require, only loans made
institution’s size or capital levels.
after January 1, 2025, the planned
For the reasons stated above, FCA is
effective date of this rule, would be
not adopting an HVCRE exclusion for de subject to the HVCRE risk-weighting
minimis financings.
requirements. Loans made prior to
January 1, 2025 could continue to be
3. Reclassification as a Non-HVCRE
risk-weighted as they are under the preExposure
existing version of the rule.
Under the proposal, a System
After January 1, 2025, when a System
institution would be allowed to
institution modifies a loan or if a project
reclassify an HVCRE exposure as a non- is altered in a manner that materially
HVCRE exposure when the substantial
changes the underwriting of the credit
completion of the development or
facility (such as increases to the loan
construction on the real property has
amount, changes to the size and scope
occurred and the cash flow generated by of the project, or removing all or part of
the property covered the debt service
the 15 percent minimum capital
and expenses on the property in
contribution in a project), the institution
accordance with the institution’s loan
must treat the loan as a new exposure
underwriting standards for permanent
and reevaluate the exposure to
financings. Each System institution
determine whether or not it is an
should have prudent, clear, and
HVCRE exposure.
measurable underwriting standards,
5. Impact on Prior FCA Board Actions
which we may review through the
examination process.
Existing FCA Bookletter BL–070
The System Comment Letter
authorizes System institutions to assign
requested FCA clarify its expectations
a 50- or 75-percent risk weight for RWW
for when an HVCRE project can be
facilities that satisfy certain criteria, but
reclassified. The letter asked for
it does not permit these risk weights for
clarification of ‘‘the period that follows
exposures when a RWW facility is not
project completion to determine
fully operational due to initial
whether a projected cash flow is
construction or major renovation. RWW
acceptable for purposes of
exposures subject to a 50- or 75-percent
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income covers repayment would not
meet the definition of HVCRE.
For the reasons stated above, FCA is
not adopting an HVCRE exclusion for
credit facilities where repayment would
be from the ongoing business of the
borrower.
80 The Farm Credit of Florida, ACA Letter, dated
January 21, 2022, and the Farm Credit West, ACA
Letter, dated January 22, 2022, repeated the System
Comment Letter’s comment verbatim.
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risk weight under BL–070 will continue
81 System
Comment Letter, page 4.
82 Id.
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to receive these risk weights after this
HVCRE rule becomes effective.
Bookletter-070 currently provides that
exposures not subject to the 50- or 75percent risk weight are assigned risk
weights in accordance with Part 628 of
FCA’s regulations. Because this HVCRE
rule is not yet in effect, these exposures
are currently risk weighted at 100percent as corporate exposures under
§ 628.32(f)(1) when they are in the
construction phase. However, as this
bookletter is currently written, once the
HVCRE risk weight becomes effective
such construction exposures would be
assigned the HVCRE risk weight if the
HVCRE definition were met and no
exclusions applied.
Before the rule’s planned effective
date of January 1, 2025 (which is before
BL–070’s existing sunset date of
November 2025), FCA plans to revise
BL–070 to provide that RWW
construction exposures not subject to a
50-or 75-percent risk weight under the
bookletter will continue to be riskweighted as corporate exposures. FCA
plans to revise the risk weight of these
exposures because of the unique
characteristics of RWW exposures
discussed above.
Similarly, electric cooperative
exposures assigned 20- or 50-percent
risk weights under FCA Bookletter BL–
053, including exposures to some power
plants that are in the construction
phase, will continue to receive these
risk weights under the bookletter even
after this rule becomes effective. Under
the bookletter, electric cooperative
exposures that are not assigned a 20- or
50-percent risk weight are subject to the
‘‘current’’ (as of the 2007 adoption of the
bookletter) regulatory risk weight under
former § 615.5211,83 which was 100
percent.84 Therefore, under the
bookletter, electric cooperative
construction exposures that are not
assigned a 20- or 50-percent risk weight
will be assigned a 100 percent risk
weight and will not be subject to risk
weights in Part 628 (including the new
HVCRE risk weight).
83 FCA rescinded § 615.5211 when the capital
rule it adopted in 2016, including the risk weights
in § 628.32, became effective on January 1, 2017.
84 Under former § 615.5211(d) as it existed in
2007, the 100-percent risk weight category
comprised standard risk assets such as those
typically found in a loan or lease portfolio. In
addition, former § 615.5211(d)(1) provided that the
100-percent risk weight category included all
claims on private obligors that were not included
in another category and § 615.5211(12) provided
that the category included all other assets not
specified elsewhere.
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III. Regulatory Analysis
A. Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), FCA hereby certifies the final
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.
B. Congressional Review Act
Under the provisions of the
Congressional Review Act (5 U.S.C. 801
et seq.), the Office of Management and
Budget’s Office of Information and
Regulatory Affairs has determined that
this final rule is not a ‘‘major rule’’ as
the term is defined at 5 U.S.C. 804(2).
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, the Farm Credit
Administration amends part 628 of
chapter VI, title 12 of the Code of
Federal Regulations as follows:
PART 628—CAPITAL ADEQUACY OF
SYSTEM INSTITUTIONS
1. The authority citation for part 628
continues to read as follows:
■
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12,
2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3,
4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 8.0, 8.3, 8.4,
8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073,
2074, 2075, 2076, 2093, 2122, 2128, 2132,
2146, 2154, 2154a, 2160, 2202b, 2211, 2243,
2252, 2279aa, 2279aa–3, 2279aa–4, 2279aa–6,
2279aa–8, 2279aa–10, 2279aa–12); sec.
301(a), Pub. L. 100–233, 101 Stat. 1568, 1608,
as amended by sec. 301(a), Pub. L. 103–399,
102 Stat 989, 993 (12 U.S.C. 2154 note); sec.
939A, Pub. L. 111–203, 124 Stat. 1326, 1887
(15 U.S.C. 78o–7 note).
2. Amend § 628.2 by adding paragraph
(6) to the definition of ‘‘Corporate
exposure’’ and a new definition, in
alphabetical order, for ‘‘High volatility
commercial real estate (HVCRE)
exposure’’ to read as follows:
ddrumheller on DSK120RN23PROD with RULES1
■
§ 628.2
Definitions.
*
*
*
*
*
Corporate exposure * * *
*
*
*
*
*
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(6) A high volatility commercial real
estate (HVCRE) exposure;
*
*
*
*
*
High volatility commercial real estate
(HVCRE) exposure means:
(1) A credit facility secured by land or
improved real property that, prior to
being reclassified by the System
institution as a non-HVCRE exposure
pursuant to paragraph (6) of this
definition:
(i) Primarily finances, has financed, or
refinances the acquisition, development,
or construction of real property;
(ii) Has the purpose of providing
financing to acquire, develop, or
improve such real property into income
producing real property; and
(iii) Is dependent upon future income
or sales proceeds from, or refinancing
of, such real property for the repayment
of such credit facility.
(2) An HVCRE exposure does not
include a credit facility financing:
(i) The acquisition, development, or
construction of properties that are:
(A) One- to four-family residential
properties, provided that the dwelling
(including attached components such as
garages, porches, and decks) represents
at least 50 percent of the total appraised
value of the collateral secured by the
first or subsequent lien. Credit facilities
that do not finance the construction of
one- to four-family residential
structures, but instead solely finance
improvements such as the laying of
sewers, water pipes, and similar
improvements to land, do not qualify for
the one- to four-family residential
properties exclusion;
(B) [Reserved]
(C) Agricultural land, as defined in
§ 619.9025 of this chapter, or real estate
used as an integral part of an aquatic
operation. This provision applies only
to financing for the agricultural and
aquatic needs of bona fide farmers,
ranchers, and producers and harvesters
of aquatic products under § 613.3000 of
this chapter. This provision does not
apply to loans for farm property
construction and land development
purposes;
(ii) The acquisition or refinance of
existing income-producing real property
secured by a mortgage on such property,
if the cash flow being generated by the
real property is sufficient to support the
debt service and expenses of the real
property, in accordance with the System
institution’s applicable loan
underwriting criteria for permanent
financings;
(iii) Improvements to existing income
producing improved real property
secured by a mortgage on such property,
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25129
if the cash flow being generated by the
real property is sufficient to support the
debt service and expenses of the real
property, in accordance with the System
institution’s applicable loan
underwriting criteria for permanent
financings; or
(iv) Commercial real property projects
in which:
(A) The loan-to-value ratio is less than
or equal to the applicable loan-to-value
limit set forth in Appendix A to this
part;
(B) The borrower has contributed
capital of at least 15 percent of the real
property’s appraised, ‘‘as completed’’
value to the project. The use of an ‘‘as
is’’ appraisal is allowed in instances
where an ‘‘as completed’’ value
appraisal is not available. The use of an
evaluation of the real property instead
of an appraisal to determine the ‘‘as
completed’’ appraised value is allowed
if § 614.4260(c) of this chapter permits
evaluations to be used in lieu of
appraisals. The contribution may be in
the form of:
(1) Cash;
(2) Unencumbered readily marketable
assets;
(3) Paid development expenses out-ofpocket;
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.
(v) Loans originated for less than
$500,000.
(3) An HVCRE exposure does not
include any loan made prior to January
1, 2025.
(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
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Federal Register / Vol. 89, No. 70 / Wednesday, April 10, 2024 / Rules and Regulations
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 nonHVCRE 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].
*
*
*
TABLE 3 TO § 628.63—CAPITAL
ADEQUACY
*
3. Amend § 628.32 by adding
paragraph (j) to read as follows:
■
§ 628.32
Quantitative disclosures.
(b) Risk-weighted assets for:
General risk weights.
*
*
*
*
*
*
*
(j) High volatility commercial real
estate (HVCRE) exposures. A System
institution must assign a 150-percent
risk weight to an HVCRE exposure.
*
*
*
*
*
*
*
*
*
4. Amend § 628.63 by adding entry
(b)(8) to Table 3 to read as follows:
■
§ 628.63
*
Disclosures.
*
*
*
*
*
*
(8) HVCRE exposures;
*
*
*
*
*
*
*
5. Add Appendix A to Part 628 to read
as follows:
■
Appendix A to Part 628—Loan-to-Value
Limits for High Volatility Commercial
Real Estate Exposures
Table A sets forth the loan-to-value limits
specified in paragraph (2)(iv)(A) of the
definition of high volatility commercial real
estate exposure in § 628.2.
TABLE A—LOAN-TO-VALUE LIMITS FOR HIGH VOLATILITY COMMERCIAL REAL ESTATE EXPOSURES
Loan-to-value limit
(percent)
Loan category
Raw Land ...............................................................................................................................................................................
Land development .................................................................................................................................................................
Construction:
Commercial, multifamily,1 and other non-residential .....................................................................................................
1- to 4-family residential .................................................................................................................................................
Improved property ..........................................................................................................................................................
Owner-occupied 1- to 4-family and home equity ...........................................................................................................
65
75
80
85
85
2 85
1 Multifamily
construction includes condominiums and cooperatives.
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.
ddrumheller on DSK120RN23PROD with RULES1
2 If
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-tovalue 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: March 29, 2024.
Ashley Waldron,
Secretary to the Board, Farm Credit
Administration.
[FR Doc. 2024–07060 Filed 4–9–24; 8:45 am]
BILLING CODE 6705–01–P
VerDate Sep<11>2014
16:36 Apr 09, 2024
Jkt 262001
DEPARTMENT OF HOMELAND
SECURITY
U.S. Customs and Border Protection
DEPARTMENT OF THE TREASURY
19 CFR Part 12
[CBP Dec. 24–09]
RIN 1515–AE82
Imposition of Import Restrictions on
Archaeological and Ethnological
Material of Pakistan
U.S. Customs and Border
Protection, Department of Homeland
Security; Department of the Treasury.
ACTION: Final rule.
AGENCY:
This document amends the
U.S. Customs and Border Protection
(CBP) regulations to reflect the
imposition of import restrictions on
archaeological and ethnological
materials from the Islamic Republic of
Pakistan (Pakistan). These restrictions
are imposed pursuant to an agreement
between the United States and Pakistan,
SUMMARY:
PO 00000
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Fmt 4700
Sfmt 4700
entered into under the authority of the
Convention on Cultural Property
Implementation Act. This document
amends the CBP regulations, adding
Pakistan to the list of countries which
have bilateral agreements with the
United States imposing cultural
property import restrictions, and
contains the Designated List, which
describes the archaeological and
ethnological materials to which the
restrictions apply.
DATES:
Effective on April 10, 2024.
For
legal aspects, W. Richmond Beevers,
Chief, Cargo Security, Carriers and
Restricted Merchandise Branch,
Regulations and Rulings, Office of
Trade, (202) 325–0084, ototrrculturalproperty@cbp.dhs.gov. For
operational aspects, Julie L. Stoeber,
Chief, 1USG Branch, Trade Policy and
Programs, Office of Trade, (202) 945–
7064, 1USGBranch@cbp.dhs.gov.
FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION:
E:\FR\FM\10APR1.SGM
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Agencies
[Federal Register Volume 89, Number 70 (Wednesday, April 10, 2024)]
[Rules and Regulations]
[Pages 25117-25130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-07060]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
========================================================================
Federal Register / Vol. 89, No. 70 / Wednesday, April 10, 2024 /
Rules and Regulations
[[Page 25117]]
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: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA or Agency) is amending its
regulatory capital requirements for Farm Credit System (FCS or System)
banks and associations to define and establish a risk weight for High
Volatility Commercial Real Estate (HVCRE) exposures.
DATES: The final rule will be effective January 1, 2025.
FOR FURTHER INFORMATION CONTACT:
Technical information: Ryan Leist, [email protected], Associate
Director, Finance and Capital Markets Team, or Xahra Pollard,
[email protected], Senior Policy Analyst, Office of Regulatory Policy,
(703) 883-4223, TTY (703) 883-4056 or [email protected]; or
Legal information: Jennifer Cohn, [email protected], Assistant General
Counsel, Office of General Counsel, (703) 883-4020, TTY (703) 883-4056.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Objectives of the Final Rule
B. Background
1. Farm Credit System
2. Post-Financial Crisis Capital Rulemakings
3. ADC Lending Risk and HVCRE Risk Weight
II. Summary of the Proposed Rule, Comments Received, and Final Rule
A. Summary of the Proposed Rule
B. Comments Received
C. Discussion of Final Rule and Responses to Comments
1. Scope of HVCRE Exposure Definition
2. Exclusions From HVCRE Exposure Definition
a. One- to Four-Family Residential Properties
b. Agricultural Land
c. Loans on Existing Income Producing Properties That Qualify as
Permanent Financings
d. Certain Commercial Real Property Projects
i. Loan-to-Value Limits
ii. Contributed Capital
iii. Value Appraisal
iv. Project
e. Loans Originated for Less Than $500,000
f. Consideration of Additional Exclusions
i. Project Financing of Public and Private Facilities
ii. Agricultural Production or Processing Facilities With
Contractual Purchase Agreements in Place
iii. Minor Improvements or Alterations to Real Property
iv. Credit Facilities Where Repayment Would Be From the Ongoing
Business of the Borrower
v. De Minimis Financings
3. Reclassification as a Non-HVCRE Exposure
4. Applicability Only to Loans Made After January 1, 2025
5. Impact on Prior FCA Board Actions
III. Regulatory Analysis
A. Regulatory Flexibility Act
B. Congressional Review Act
I. Introduction
A. Objectives of the Final Rule
FCA's objectives in adopting this rule are to:
Update capital requirements to reflect the increased risk
characteristics exposures to certain acquisition, development or
construction (ADC) loans pose to System institutions; and
Ensure the System's capital requirements are comparable to
the Basel Framework issued by the Basel Committee on Banking
Supervision (BCBS or Basel Committee) and the standardized approach the
Federal banking regulatory agencies (FBRAs) have adopted,\1\ with
deviations as appropriate to accommodate the different regulatory,
operational, and credit considerations of the System.
---------------------------------------------------------------------------
\1\ The FBRAs are the Office of the Comptroller of the Currency
(OCC), Board of Governors of the Federal Reserve System (FRB), and
the Federal Deposit Insurance Corporation (FDIC). In general, under
the standardized approach, an institution's regulator assigns fixed
risk weights to exposures based on their relative risk
characteristics. (See Basel Framework at CRE 20).
---------------------------------------------------------------------------
B. Background
1. Farm Credit System
In 1916, Congress created the System to provide permanent,
affordable, and reliable sources of credit and related services to
American agricultural and aquatic producers. As of January 1, 2024, the
System consists of three Farm Credit Banks, one agricultural credit
bank, 55 agricultural credit associations, one Federal land credit
association, several service corporations, and the Federal Farm Credit
Banks Funding Corporation (Funding Corporation).\2\ System banks
(including both the Farm Credit Banks and the agricultural credit bank)
issue Systemwide consolidated debt obligations in the capital markets
through the Funding Corporation,\3\ which enables the System to extend
short-, intermediate-, and long-term credit and related services to
eligible borrowers. Eligible borrowers include farmers, ranchers,
aquatic producers and harvesters and their cooperatives, rural
utilities, exporters of agricultural commodities products, farm-related
businesses, and certain rural homeowners. The System's enabling statute
is the Farm Credit Act of 1971, as amended (Act).\4\
---------------------------------------------------------------------------
\2\ The Federal Agricultural Mortgage Corporation (Farmer Mac)
is a Farm Credit System institution that was established in 1988 to
create a secondary market for agricultural real estate mortgage
loans and other rural-focused loans. The FCA has a separate set of
capital regulations, at subpart B of part 652, that apply to Farmer
Mac. This rulemaking does not affect Farmer Mac, and the use of the
term ``System institution'' in this preamble and rule does not
include Farmer Mac.
\3\ The Funding Corporation was established pursuant to section
4.9 of the Farm Credit Act of 1971, as amended, and is owned by all
System banks. The Funding Corporation is the fiscal agent and
disclosure agent for the System. The Funding Corporation is
responsible for issuing and marketing debt securities to finance the
System's loans, leases, and operations and for preparing and
producing the System's financial results.
\4\ 12 U.S.C. 2001-2279cc. The Act is available at www.fca.gov
under ``Laws and regulations'' and ``Statutes.''
---------------------------------------------------------------------------
2. Post-Financial Crisis Capital Rulemakings
In October 2013 and April 2014, the FBRAs published in the Federal
Register capital rules governing the banking organizations they
regulate (the U.S. rule).\5\ When it was adopted, the U.S. rule
reflected, in part, the BCBS's
[[Page 25118]]
document entitled ``Basel III: A Global Regulatory Framework for More
Resilient Banks and Banking Systems'' (Basel III).\6\ Although the U.S.
rule has been updated since then, the risk weights generally have not
changed.
---------------------------------------------------------------------------
\5\ 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).
\6\ See ``Basel III: A global regulatory framework for more
resilient banks and banking systems,'' revised version June 2011,
and other Basel III documents at https://www.bis.org/bcbs/basel3.htm?m=2572. Prior to the FBRAs' adoption of these
regulations, their rules reflected earlier Basel frameworks.
---------------------------------------------------------------------------
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.\7\ Basel III was an internationally agreed upon
set of measures developed in response to the 2007-2009 worldwide
financial crisis with the goal of strengthening the regulation,
supervision, and risk management of banks. Since that time, the BCBS
has revised, updated, and integrated the Basel III reforms into a
consolidated Basel Framework (Basel Framework), which comprises of all
of the current and forthcoming BCBS standards.\8\ U.S. banking
regulators are not required by law to adopt the Basel Framework but, as
discussed above, the U.S. rule, which the FBRAs continue to update,\9\
is Basel-based.\10\
---------------------------------------------------------------------------
\7\ The FBRAs are represented on the Basel Committee, but the
FCA is not.
\8\ The Basel Framework can be found at https://www.bis.org/basel_framework/index.htm, and the BCBS continues to update it as
indicated on the website.
\9\ On September 18, 2023, the FBRAs issued a notice of proposed
rulemaking (FR 88 64028) that would substantially revise the capital
requirements applicable to large banking organizations and to
banking organizations with significant trading activity. The
proposed revisions would be generally consistent with recent changes
to international capital standards by the BCBS.
\10\ The Federal Housing Finance Agency, which oversees the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, has also adopted Basel-based capital rules.
---------------------------------------------------------------------------
FCA has had tier 1/tier 2 capital rules that are comparable to the
Basel guidelines and the U.S. rule since 2016.\11\ Beginning in 2010,
System institutions requested FCA adopt a capital framework that was as
similar as possible to the capital guidelines of the FBRAs. 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.\12\
---------------------------------------------------------------------------
\11\ While FCA's earlier capital regulations incorporated some
elements of Basel standards and the FBRAs' rules, particularly the
risk weighting of assets in the denominator of the capital ratios,
the rule FCA adopted in 2016 aligned the System's capital
requirements more closely with the Basel III framework and with the
U.S. rule's standardized approach (which was based on Basel
standards). See 81 FR 49720 (July 28, 2016). FCA has amended its
capital rules since 2016, most significantly in 2021. See 86 FR
54347 (October 1, 2021). Like the FBRAs, FCA is not required by law
to follow the Basel standards. The FCA's rule differed in some
respects from the Basel standards and the U.S. rule in consideration
of the cooperative structure and the organization of the System.
\12\ See 79 FR 52814, 52820 (September 4, 2014).
---------------------------------------------------------------------------
3. ADC Lending Risk and HVCRE Risk Weight
Included in the provisions of FCA's 2014 proposed rulemaking to
revise its regulatory capital requirements was a 150 percent risk
weight for HVCRE exposures due to their higher risk
characteristics.\13\ As discussed below, HVCRE exposures are defined as
acquisition, development, or construction exposures that meet certain
criteria, and do not qualify for any of the exclusions, in the
definition.
---------------------------------------------------------------------------
\13\ 79 FR 52814 (September 4, 2014).
---------------------------------------------------------------------------
HVCRE exposures have increased risk characteristics supporting a
150 percent risk weight. Key risks to projects during the development
and construction phase include, among others, financial risks, contract
risks, and environmental risks. Financial risks include, but are not
limited to, project delays and cost overruns, sponsor risk, project
feasibility risk, and contractor risks. While these risks can be a
threat to any type of lending, they are of particular risk to
construction loans, because they can hinder project completion, and
repayment of construction loans usually cannot begin until the project
is finished.\14\
---------------------------------------------------------------------------
\14\ Projects where repayment can begin before completion have
fewer risk characteristics and may warrant a lower risk weight. As
discussed in Section II.C.1 of this preamble--Scope of HVCRE
Exposure Definition--under the third criterion of the HVCRE exposure
definition, a credit facility that will be repaid from the
borrower's ongoing business, as opposed to being repaid from future
income or sales proceeds from the property, would not be classified
as an HVCRE exposure. Moreover, as discussed in Section II.C.2.c of
this preamble--Loans on Existing Income Producing Properties That
Qualify as Permanent Financings--loans on existing income producing
properties that qualify as permanent financings are excluded from
the definition of HVCRE exposure.
---------------------------------------------------------------------------
Project delays and cost overruns are two key financial risks to
construction loans. Supply chain constraints, permit delays, and labor
shortages are some examples of factors that can contribute to the delay
of projects or their costs exceeding budget. Other financial risks
include sponsor, project feasibility, and contractor risks. Sponsors
without adequate and relevant industry and project planning experience
and expertise increase the risk of a construction project incurring
additional costs and delays, including permitting delays. Inadequate
sponsor financial strength can impact the availability of sponsor
capital when needed for budget overruns. Project feasibility
considerations include changes in either supply or demand factors,
technology considerations, and competitive forces, which could
detrimentally impact the underlying economics of a construction
project. Contractor risk can threaten the financial viability of a
construction project if the contractor does not have the requisite
experience and expertise to complete the project successfully.
Contractor inefficiencies or errors can derail a project's timeline or
budget. The financial capacity of the contractor is also critical,
especially in cases where the contractor is responsible for any cost
overruns.
Contract risk is another key category of risk in construction
lending. One of the most important contractual agreements in a
construction project is the construction contract. While some types of
construction contracts shift the responsibility of managing key aspects
of the project to a contractor, other contracts can leave the borrower
exposed to such risks as fluctuations in input costs and potential
contract disputes with sub-contractors.
Another key risk to construction projects is environmental risk.
Such risk can arise when site assessments are not properly conducted
prior to construction and unidentified environmental issues such as
contamination later derail project timelines or budgets, or even
threaten the viability of the project. Contamination can also occur
after construction has already begun and potentially involve expensive
cleanup costs. Beyond contamination, borrowers also face other
potential environmental impacts of the project, including the effects
on native habitats for flora and fauna where legal or regulatory
protections are in place.
FCA has recently seen certain System institution-funded
construction projects particularly challenged due to some of the risks
discussed above. Specifically, supply chain disruptions and labor
shortages have led to project delays and cost overruns following the
COVID-19 pandemic, recent geopolitical events, and increased inflation.
Inflationary pressures continue to persist and have impacted the costs
of some rural infrastructure projects.
Supply chain constraints and disruptions in project financings
across different industries, including the leasing sector, have in some
cases resulted in material increases in project costs and construction
delays. The
[[Page 25119]]
impact to costs and schedules has stemmed partly from the inadequate
supply of key components but also from increased input costs. Such
supply chain issues could pose a credit risk to System institutions if
construction timelines are materially impacted and construction costs
increase significantly during the construction phase.
As discussed above, various risks have continued to underscore
construction lending, some of which have been more evident in recent
years. These risks threaten the ability for such projects to be
completed in a manner that ensures adequate repayment to lenders. As
such, construction exposures warrant the higher risk weight proposed in
this rule.
The FBRAs first recognized the higher risk in construction lending
in the higher risk weights they adopted in their capital regulations in
2013-2014. FCA's 2014 proposed HVCRE provisions were very similar to
those the FBRAs had adopted. System commenters expressed concern about
parts of the proposed HVCRE definition and asked FCA not to adopt the
definition. FCA did not adopt the HVCRE provisions in its capital rule
in 2016, because it wanted to further consider and analyze HVCRE and
the issues related to these exposures. In the preamble to the final
capital rule in 2016, FCA said the Agency expected to engage in
additional HVCRE rulemaking in the future.\15\
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\15\ 81 FR 49719, 49736 (July 28, 2016).
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Beginning in 2017, the FBRAs issued several proposed rules on HVCRE
exposures to address concerns with the original definition.\16\ On May
24, 2018, the President signed into law the Economic Growth, Regulatory
Relief, and Consumer Protection Act (EGRRCPA),\17\ 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.\18\
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\16\ FCA staff submitted a comment letter in response to one of
the proposals that communicated concerns with a proposed exemption
for agricultural land.
\17\ Public Law 115-174, 132 Stat. 1296 (2018).
\18\ 84 FR 68019.
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Recognizing the need to update capital requirements to reflect the
increased risk characteristics that exposures to HVCRE loans pose to
System institutions, and in accordance with this rule's objective to
ensure continued comparability to the Basel guidelines and the FBRAs'
rules, on August 26, 2021, FCA published in the Federal Register a
notice of proposed rulemaking (proposed rule or proposal) seeking
public comment on amendments to its capital rules to define and
establish a risk weight for HVCRE exposures.\19\
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\19\ 86 FR 47601 (August 26, 2021). The proposed rule included a
90-day comment period. On October 20, 2021, FCA published in the
Federal Register a notice extending the comment period for an
additional 60 days, until January 24, 2022.
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II. Summary of the Proposed Rule, Comments Received, and Final Rule
FCA's proposed rule was similar to the FBRAs' rule in most
respects, with deviations as appropriate to accommodate the different
regulatory, operational, and credit considerations of the System.
Notably, the proposed rule contained provisions from the FBRAs' final
rule that addressed certain concerns commenters raised in response to
the FCA's 2014 proposed rule.
As discussed further below, FCA is adopting a final definition of
HVCRE exposure with one modification from the proposal based on
comments received. The Agency is also clarifying in this preamble
certain provisions of the HVCRE rule.
FCA reminds System institutions that this is a risk-weighting
regulation only. System scope and eligibility authorities are contained
in other provisions of FCA's regulations and in the Act.\20\
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\20\ As stated in the preamble to the capital rule FCA adopted
in 2016, ``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).
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A. Summary of the Proposed Rule
Because of the increased risk characteristics in HVCRE exposures,
FCA proposed, 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.\21\
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\21\ FCA regulation Sec. 628.32(f)(1).
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B. Comments Received
In response to the HVCRE proposal, FCA received 11 comment letters:
One letter from the Farm Credit Council (FCC), with input from a System
workgroup, consisting of several System institutions, that was
established to review the HVCRE proposal and other related documents
(System Comment Letter); \22\ one letter each from CoBank, ACB (CoBank
Letter),\23\ Farm Credit Bank of Texas (FCBT Letter),\24\ and AgriBank,
FCB (AgriBank Letter),\25\ all of which are System banks; and letters
from seven System associations: Farm Credit Mid-America, ACA,\26\ Farm
Credit of the Virginias, ACA,\27\ Northwest Farm Credit Services, ACA
(Northwest Letter),\28\ Capital Farm Credit, ACA,\29\ Farm Credit
West,\30\ ACA, Compeer Financial, ACA,\31\ and Farm Credit of Florida,
ACA.\32\ All System bank and association commenters supported the
System Comment Letter, and several included identical language seeking
clarification on several provisions and requesting further exclusions
to the HVCRE exposure definition. Furthermore, no commenters supported
any specific provisions of the proposed rule, and they all stated the
burden of identifying HVCRE loans on an ongoing basis greatly exceeds
the benefit of identifying the minimal potential adverse impact that
such loans could have on the safety and soundness of a System
institution. However, System commenters generally supported FCA's
attempt to ensure FCA's capital rules are similar to those adopted by
the FBRAs with the guiding principle that 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.
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\22\ System Comment Letter dated January 19, 2022.
\23\ CoBank Letter dated January 20, 2022.
\24\ FCBT Letter dated January 24, 2022.
\25\ AgriBank Letter dated January 24, 2022.
\26\ Farm Credit Mid-America, ACA Letter dated January 26, 2022.
\27\ Farm Credit of the Virginias, ACA Letter dated January 24,
2022.
\28\ Northwest Letter dated January 24, 2022. Northwest Farm
Credit Services, ACA merged with Farm Credit West, ACA to form
AgWest Farm Credit, ACA, effective January 1, 2023.
\29\ Capital Farm Credit, ACA Letter dated January 21, 2022.
\30\ Farm Credit West, ACA Letter dated January 22, 2022. Farm
Credit West, ACA merged with Northwest Farm Credit Services, ACA to
form AgWest Farm Credit, ACA, effective January 1, 2023.
\31\ Compeer Financial, ACA Letter dated January 18, 2022.
\32\ Farm Credit of Florida, ACA Letter dated January 21, 2022.
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C. Discussion of Final Rule and Responses to Comments
1. Scope of HVCRE Exposure Definition
FCA proposed to define an HVCRE exposure as ``a credit facility
secured by land or improved real property'' that met the three criteria
discussed below (and that did not meet any of the definition's
exclusions, which are discussed in Section II.C.2 of this preamble--
Exclusions From HVCRE Exposure Definition).\33\ If a credit facility
secured by land or improved real property did not meet all three
[[Page 25120]]
criteria, it would not be an HVCRE exposure.
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\33\ 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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The determination of whether a credit facility is an HVCRE exposure
is made on new exposures only. New exposures determined not to be HVCRE
after initial evaluation do not need to be evaluated again as HVCRE
exposures. New exposures include loan originations, modifications, and
project alterations that materially change 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).
Credit facilities that meet the definition of HVCRE exposure after
initial evaluation may be reclassified as non-HVCRE if they meet the
criteria discussed in Section II.C.3 of this preamble--Reclassification
as a Non-HVCRE Exposure.
Under the proposed definition, a credit facility is secured by land
or improved real property 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.\34\ For example, if an institution made a loan to
construct and equip a building, and the loan was secured by both the
real estate and the equipment, the institution would have to estimate
the value of the building, upon completion, and of the equipment. If
the value of the building was greater than 50 percent of the principal
amount of the loan at origination, the loan would be a ``credit
facility secured by land or improved real property.'' \35\ If the value
of the building, upon completion, was less than 50 percent of the
principal amount of the loan at origination, it would not be a ``credit
facility secured by land or improved real property.'' Accordingly, it
would not be an HVCRE exposure.
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\34\ This proposed definition is consistent with the definition
of ``a loan secured by real estate'' in the FBRAs' Call Report forms
and instructions.
\35\ 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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As discussed above, a credit facility that is secured by land or
improved real property would not be classified as an HVCRE exposure
under the proposed rule unless it met three criteria. If such a
facility did not meet all three criteria, it would not be an HVCRE
exposure. These criteria are discussed below.
Description of Three Criteria of HVCRE Definition
First, under paragraph (1)(i) of the proposed HVCRE definition, the
credit facility must primarily finance, have financed, or refinance the
acquisition, development, or construction of real property. This
criterion would be satisfied if more than 50 percent of the proposed
use of the loan funds was for the acquisition, development, or
construction of real property. The criterion would not be satisfied if
50 percent or less of the proposed use of the loan funds was for the
acquisition, development, or construction of real property. In the case
of revolver loans that are secured by land or real property, if more
than 50 percent of the proposed use of the revolver funds is for
acquisition, development, or construction of real property, the entire
loan would satisfy this criterion and potentially be subject to HVCRE
classification if it meets the other two criteria and is not subject to
an exclusion.
Second, under paragraph (1)(ii) of the proposed HVCRE definition,
the purpose of the credit facility must be to provide financing to
acquire, develop, or improve such real property into income-producing
property.
Finally, under paragraph (1)(iii) of the proposed HVCRE definition,
the repayment of the credit facility must depend upon the future income
or sales proceeds from, or refinancing of, such real property. The
preamble to the proposed rule explained that under this criterion,
credit facilities that would be repaid from the borrower's ongoing
business, as opposed to being repaid from future income or sales
proceeds from the property, would not be classified as an HVCRE
exposure.
Comments on HVCRE Exposure Definition and FCA's Responses
FCA received various comments on the proposed definition of HVCRE
exposures, including the three criteria. On a broad level the Farm
Credit Council, supported by all System bank and association
commenters, commented that the rulemaking was not needed due to limited
opportunity for System institutions to make HVCRE loans. They commented
that the burden in identifying these loans exceeds the benefit of
identifying the risk to safety and soundness.\36\
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\36\ CoBank Letter dated January 20, 2022, and Farm Credit of
Florida, ACA Letter, dated January 21, 2022, reiterated this comment
verbatim while Capital Farm Credit, ACA Letter, dated January 21,
2022, reiterated the comment in summary form.
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These comments are premised on a misunderstanding of the definition
of HVCRE. Specifically, these comments assert that the HVCRE risk
weight ``was designed by the FBRAs to identify commercial real estate
loans of a speculative nature (such as office buildings and strip malls
without signed lessees).'' \37\
---------------------------------------------------------------------------
\37\ System Comment Letter dated January 19, 2022, page 2.
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Contrary to the commenters' assertion, the FBRAs' definition
includes more than just speculative commercial real estate loans. The
plain language of their definition includes all credit facilities that
are secured by land or improved real property and that satisfy the
three criteria and are not subject to an exclusion. None of the
criteria and exclusions limit the HVCRE definition only to speculative
commercial real estate loans. The HVCRE definition, including the three
criteria and considering the exclusions, includes, for example, project
finance construction and construction of facilities dependent on third-
party integrator agreements. System institutions make loans of this
nature, and such loans satisfy this definition.
The System Comment Letter also stated that there are better ways to
accomplish the Agency's objectives.\38\ Two commenters referenced
System practices currently in place at System institutions to control
risk concentrations in construction exposures including risk-based
borrower ratings, concentration and hold limits, and underwriting
standards.\39\ While the Agency recognizes that System institutions can
mitigate their HVCRE risk exposures through risk management practices,
regulatory risk weights ensure that a minimum amount of capital is
reserved by all institutions. In the same way that corporate exposures
are generally risk-weighted at 100 percent \40\ and certain past due
and nonaccrual exposures are risk-weighted at 150 percent \41\ despite
variations in institutions' credit administration practices, HVCRE
exposures should all be subject to the same risk weight, regardless of
an
[[Page 25121]]
individual institution's risk management practices.
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\38\ CoBank Letter dated January 20, 2022, and Farm Credit of
Florida, ACA Letter, dated January 21, 2022, reiterated this comment
verbatim while Capital Farm Credit, ACA Letter, dated January 21,
2022, reiterated the comment in summary form.
\39\ Farm Credit of the Virginias, ACA Letter dated January 24,
2022, and Farm Credit West, ACA Letter dated January 22, 2022.
\40\ Sec. 628.32(f)(1).
\41\ FCA regulation Sec. 628.32(k)(1) assigns a 150 percent
risk weight to past due and nonaccrual exposures, except sovereign
or residential exposures, that are not guaranteed or secured by
financial collateral.
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The System Comment Letter, supported by all System bank and
association commenters, included various questions and comments
regarding the proposed third criterion.\42\ The Letter requested
clarification of the terms ``future income'' and ``income from ongoing
business''; asked whether ``income from ongoing business'' includes any
assets built and operated by the business that developed the property;
asked the percentage of future and ongoing income relied upon when
determining whether a property is income-producing; and requested
consideration of the fact that repayment can come from multiple
sources. Moreover, the letter requested an explicit exclusion in the
regulation for credit facilities for which repayment would be from the
ongoing business of the borrower as well as removal of ``third-party
rent or lease payments'' from the proposed definition. Finally, the
letter included a request for FCA to consider the impact of ``third-
party rent or lease payments'' on young, beginning, or small (YBS)
farmers who may rely on third-party integrator agreements to start
themselves in agriculture.\43\
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\42\ Farm Credit of Florida, ACA Letter, dated January 21, 2022,
reiterated the System Comment Letter's questions and comments
verbatim.
\43\ Section 4.19 of the Act requires each System association,
under policies of and subject to review and approval of its funding
bank, to prepare a program for furnishing sound and constructive
credit and related services to YBS farmers and ranchers. This
requirement is implemented by FCA regulations at 12 CFR 614.4165.
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In response to these comments, FCA reiterates that the proposed
third criterion was that the credit facility is ``dependent on future
income or sales proceeds from, or refinancing of,'' the property for
repayment. The proposed regulation did not refer to ``income from
ongoing business.'' The preamble to the proposed rule discussed loan
repayment from ongoing business as an example of a form of repayment
that does not satisfy the proposed third criterion because it is not
repayment from future income or sales proceeds from the real
property.\44\ FCA confirms that if a credit facility was dependent on
any form of repayment other than future income or sales proceeds from,
or the refinancing of, the real property, including repayment from
income generated by any assets within a borrower's portfolio, it would
not satisfy this proposed criterion and would therefore not be an HVCRE
exposure.
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\44\ 86 FR 47601, 47603 (August 26, 2021).
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The System Comment Letter specifically referenced assets built and
operated by the business that developed the property. FCA clarifies
that for the purpose of HVCRE classification, the cash flow of the
borrower must be analyzed, not that of the property developer or some
other entity other than the borrower. Because this preamble clarifies
the plain language of the third criterion, that credit facilities for
which repayment would be from the ongoing business of the borrower are
not covered by that criterion and are not HVCRE exposures, explicit
regulatory language to that effect is not needed.
In response to the question about the percentage of future and
ongoing income relied upon when determining whether a property is
income-producing and for consideration of the fact that repayment can
come from multiple sources (both ongoing and future income or sales
proceeds), FCA retains the proposed requirement that if any part of the
repayment on a credit facility depends on future income or sales
proceeds, the credit facility satisfies the proposed third criterion.
FCA believes specifying a percentage threshold for future income other
than zero to determine HVCRE status would be overly complicated and
burdensome. The Agency recognizes that repayment of credit facilities
may come from multiple sources but, for the purpose of HVCRE
classification, if any repayment depends on future income or sales
proceeds, the exposure would meet the proposed third criterion of the
definition of HVCRE.
Regarding the System Comment Letter's request to remove ``third-
party rent or lease payments'' from the proposed definition of HVCRE
exposure, FCA notes that terminology is not actually included in the
definition. Rather, it is found in the preamble to the proposed rule,
in a discussion of ``certain commercial real property projects'' that
would qualify for exclusion from HVCRE.\45\ As such, there is no need
to remove that term from the definition of HVCRE. However, in Section
II.C.2.d of this preamble--Certain Commercial Real Property Projects--
the reference to ``third-party rent or lease payments'' that was in the
preamble to the proposed rule has been replaced with a reference to
``revenues from future income.''
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\45\ 86 FR 47601, 47604 (August 26, 2021).
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As discussed above, credit facilities where repayment would be from
any type of future income, including third-party rents or lease
payments, were included in the proposed definition of HVCRE to reflect
the risk of such facilities. Excluding third-party rents or lease
payments, including third-party integrator agreements, from the
definition of future income is not warranted by the risk in those
exposures. There is further discussion around exclusions for integrator
contracts in Section II.C.2.f.ii of this preamble--Agricultural
Production or Processing Facilities with Contractual Purchase
Agreements in Place--including the Agency's consideration of YBS
farmers.
For the reasons stated above, FCA is adopting as final, without
change from the proposal, the definition of HVCRE as a credit facility
secured by land or improved real property. In addition, the Agency is
adopting, as proposed, the three criteria outlined above. The
exclusions from the HVCRE definition, as well as related comments and
FCA's responses, will be discussed in the next section of the preamble.
FCA's final rule is similar to the FBRAs' rule in most respects,
but it differs in two general areas. The FBRAs' rule clarified the
interpretation of certain terms generally to be consistent with their
usage in other FBRA regulations or Call Report instructions. The FCA
did not propose different interpretations of these terms, nor did the
Agency propose to refer to these FBRA references. In addition, FCA
proposed some differences where appropriate to accommodate the
different regulatory, operational, and credit considerations of the
System, while continuing to maintain appropriate safety and soundness.
FCA's proposed definition of HVCRE exposure was intended to capture
only those exposures that have increased risk characteristics in the
acquisition, development, or construction of real property.
2. Exclusions From HVCRE Exposure Definition
Under FCA's HVCRE proposal, like the FBRA rule, four broad types of
exposures were excluded from the definition of HVCRE exposure. These
types of exposures are discussed in the following sections.
a. One- to Four-Family Residential Properties
Under paragraph (2)(i)(A) of FCA's proposed HVCRE definition, as in
a similar provision of the FBRA rule, an HVCRE exposure did 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) represented at least 50 percent of
the total appraised value of
[[Page 25122]]
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
proposed exclusion, as would construction loans secured by single
family dwelling units, duplex units, and townhouses. Condominium and
cooperative construction loans would qualify for this proposed
exclusion, even if the loan was financing the construction of a
building with five or more dwelling units, if the repayment of the loan
came from the sale of individual condominium dwelling units or
individual cooperative housing units.
This proposed 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 proposed exclusion only if the property
securing the credit facility exhibited 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
proposed exclusion.
Loans for multifamily residential property construction (such as
apartment buildings where loan repayment is dependent upon apartment
rental income) would not qualify for this proposed exclusion.\46\
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\46\ 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(b).
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Loans used solely to acquire undeveloped land for the purpose of
constructing one- to four-family residential structures would not
qualify for this proposed 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 proposed exclusion. A credit facility that
combines the financing of land development and the construction of one-
to four-family structures would qualify for this proposed exclusion.
FCA did not receive any comments on this proposed exclusion and is
adopting the exclusion as proposed.
b. Agricultural Land
Under paragraph (2)(i)(C) of its proposed HVCRE definition, FCA
proposed to exclude 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. FCA regulation Sec. 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.''
The proposed exclusion applied 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 did not apply to loans for farm property
construction or land development purposes.
FCA intended its 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.\47\ 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
``farmland'' loans, and therefore such loans do not fall within the
FBRAs' agricultural land exclusion. Unlike the FBRAs, FCA proposed to
expressly include within the agricultural land exclusion real estate
that is an integral part of an aquatic operation.
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\47\ See Federal Financial Institutions Examination Council
(FFIEC) 031 and FFIEC 041--Instructions for Preparation of
Consolidated Reports of Condition and Income.
---------------------------------------------------------------------------
As in the FBRAs' final rule, loans for land development purposes
and farm property construction would not have been eligible in FCA's
proposed rule for the agricultural land exclusion. 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.
Exposures to land in transition--agricultural land in the path of
development--were not automatically excluded from the definition of
HVCRE through the proposed agricultural land exclusion. These exposures
would need to be evaluated against the three criteria of the HVCRE
definition discussed in Section II.C.1 of this preamble--Scope of HVCRE
Exposure Definition--as well as all exclusions discussed in this
preamble, to determine whether they are HVCRE exposures.
FCA received several comments related to the proposed agricultural
land exclusion. The System Comment Letter, and several other comment
letters,\48\ highlighted the section of the proposed rule preamble that
explained the exclusion would not apply to loans for farm property
construction, including farm buildings. They stated that not applying
the exclusion to the construction of farm buildings was contradictory
to the underlying premise of the agricultural land exclusion and did
not recognize the lower risk of these types of ``on-farm facilities.''
\49\ The letter requested that FCA add ``not related to on-going
farming operations'' after the term ``farm buildings,'' indicating that
the interdependent nature of System loan packages and the fact that
farm construction projects are often related to ongoing farming
operations reduces the risk of such projects.\50\
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\48\ FCBT Letter dated January 24, 2022, Farm Credit of the
Virginias, ACA Letter dated January 24, 2022, Capital Farm Credit,
ACA Letter dated January 21, 2022, Farm Credit West, ACA Letter
dated January 22, 2022 and Farm Credit of Florida, ACA Letter dated
January 21, 2022.
\49\ System Comment Letter dated January 19, 2022, page 3.
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As discussed above, the scope of FCA's proposed agricultural land
exclusion was similar to that of the FBRAs' (except that FCA's proposed
exclusion added exposures to real estate that is an integral part of an
aquatic operation). The FBRAs' exclusion includes exposures to
``farmland'' only and does not include loans for farm property
construction. Therefore, the commenters' statement that not applying
the exclusion to the
[[Page 25123]]
construction of farm buildings is contradictory to the underlying
premise of the agricultural land exclusion is not correct.
In response to the commenters' request that FCA expand the scope of
the proposed exclusion to include the construction of farm buildings
related to ongoing farming operations, FCA notes, as discussed in
Section II.C.1 of this preamble--Scope of HVCRE Exposure Definition,
that farm building construction projects where repayment of the credit
facility will be from ongoing farming operations do not meet the third
criterion of the proposed HVCRE definition and would not be subject to
the increased risk weight. The third criterion is that repayment of the
credit facility is dependent on the future income or sales proceeds, or
refinancing of, the real property.\50\ This risk-weighting treatment
reflects the lower relative risk characteristics of these exposures.
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\50\ As discussed in Section II.C.1 of this preamble--Scope of
HVCRE Exposure Definition--in the case of revolver loans secured by
land or real property where more than 50 percent of the proposed use
of the revolver funds is for acquisition, development, or
construction of real property, the entire revolver would be subject
to the HVCRE definition if it also meets the other two criteria and
is not subject to an exclusion.
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On the other hand, farm construction projects where repayment will
depend on future income or the sales proceeds from the real property
would meet the third criterion of the proposed HVCRE definition. Such
projects have increased risk characteristics, justifying a higher risk
weight compared to projects with repayment from ongoing operations.
They would be assigned a higher risk weight under the FBRAs' rules and
would be assigned a higher risk weight under FCA's proposed rule as
well.
In discussing the proposed Agricultural Land exclusion, the System
Comment Letter, as well as two other letters,\51\ requested that FCA
consider potential obstacles for YBS borrower entry into agriculture.
These commenters stated that farm construction projects by YBS
borrowers are often not part of ongoing farming operations and would
potentially have higher costs of credit if subject to the 150 percent
HVCRE risk weight. FCA believes excluding all YBS borrowers from the
HVCRE risk weight would present safety and soundness concerns and
detract from the objectives of this rule. However, as discussed in
Section II.C.2.e of this preamble--Loans Originated for Less Than
$500,000--the final rule includes an HVCRE exclusion for loans
originated under $500,000, which will benefit some YBS borrowers.\52\
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\51\ FCBT Letter dated January 24, 2022, and Farm Credit of
Florida Letter dated January 21, 2022.
\52\ Page 30 of the 2022 Annual Report of the Farm Credit
Administration shows that for all three categories of YBS loans, the
average size of loans outstanding as of December 31, 2022, and of
loans made in 2022 was less than $500,000.
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For the reasons stated above, FCA is adopting as final, without
change from the proposal, the agricultural land exclusion.
c. Loans on Existing Income Producing Properties That Qualify as
Permanent Financings
As in the FBRA rule, FCA proposed, in paragraph (2)(ii) of its
definition of HVCRE exposure, to exclude 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. FCA also proposed, in part (2)(iii) of
its definition of HVCRE, to exclude credit facilities financing
improvements to existing income-producing real property secured by a
mortgage on such property. The preamble to the proposed rule noted that
examiners may review the reasonableness of a System institution's
underwriting standards for permanent loans through the regular
examination process to ensure the real estate lending policies are
consistent with safe and sound banking practices.
Under the proposal, loans such as agribusiness or rural project
financing transactions, among other 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.
Loans that are not secured by existing income-producing real
property, however, would not fall under this proposed exclusion. Such
loans often pose a greater credit risk than permanent loans. FCA
believes it is appropriate to classify these loans as HVCRE exposures
and impose a 150 percent risk weight given their increased risk
characteristics compared to other commercial real estate exposures
(unless the loan satisfies one of the other exclusions). However, as
discussed in Section II.C.3 of this preamble--Reclassification as a
Non-HVCRE Exposure, the proposal would allow a System institution to
reclassify these HVCRE exposures as non-HVCRE exposures if they
satisfied the two conditions in paragraph (6) of the proposed rule.
FCA received one comment on the proposed exclusion for existing
income producing properties that qualify as permanent financings. The
System Comment Letter referenced a ``cash flow `test' '' to determine
the sufficiency of the cash flow generated by real property to support
the debt service and expenses.\53\ The Letter requested the test be
conducted only once at loan origination and not be required again
assuming the loan continues to pay as agreed. While neither the
preamble to the proposed rule nor the rule text itself explicitly
referenced a cash flow ``test'', FCA interprets the comment as
reference to the underwriting analysis performed in determining whether
a loan qualifies for this exclusion. The Agency is clarifying that once
a loan has undergone this analysis at origination or purchase for the
purpose of HVCRE classification, the institution does not need to
reassess the loan again for that purpose. However, as with any
permanent financing, the institution must have procedures in place for
monitoring the ongoing quality of the loan. These procedures could
include ongoing loan analysis.\54\
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\53\ System Comment Letter dated January 19, 2022, page 3.
\54\ FCA regulation Sec. 614.4170 outlines the responsibilities
of direct lenders to service the loans they make, including having
policies and procedures in place to preserve the quality of sound
loans and help correct deficiencies as they develop.
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For the reasons stated above, FCA is adopting as final, without
change from the proposal, the exclusion for loans on existing income
producing properties that qualify as permanent financings.
d. Certain Commercial Real Property Projects
As in the FBRA rule, FCA proposed, in paragraph (2)(iv) of its
HVCRE definition, 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 future
income. Commercial real property project loans do not include ordinary
business loans and lines of credit in which real property is taken as
[[Page 25124]]
collateral. As it relates to the System, FCA believes this proposed
exclusion is most relevant to agribusiness (processing and marketing
entities and farm-related businesses) and rural project financing.
To qualify for this proposed 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 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.
i. 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.\55\ 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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\55\ 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.\56\
Nevertheless, FCA examination guidance from 2009 makes clear that FCA
expectations are consistent with the Interagency Guidelines, including
the supervisory LTV limits.\57\ FCA believes exposures should satisfy
these LTV limits to qualify for this proposed exclusion to the HVCRE
definition. In paragraph (2)(iv)(A) of the final rule, the Agency
proposed 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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\56\ 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.
\57\ 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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The System Comment Letter requested that FCA consider the potential
impact of these proposed LTV limits on YBS lending. For the reasons
discussed above, FCA is not providing an exclusion for all YBS
borrowers. However, the final rule includes an HVCRE exclusion for
loans originated under $500,000, which will benefit some YBS borrowers.
For the reasons stated above, FCA is adopting as final this
provision of the proposed rule.
ii. Contributed Capital
Under paragraph (2)(iv)(B) and (C) of FCA's proposed definition of
HVCRE exposures, borrowers must contribute capital of at least 15
percent of the real property's value to the project to qualify for the
commercial real property projects exclusion. 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.
FCA's proposed rule required the value of contributed property to
be determined in accordance with FCA regulations at Part 614, Subpart
F, which are generally similar to the FIRREA standards adopted in the
FBRA rule.\58\ Under the proposed rule, 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. In addition, the preamble to the
proposed rule explained that contributed property or improvements would
have to be ``directly related'' to the project to be eligible to count
towards the capital contribution. As explained in that preamble, under
the proposed rule real estate not developed as part of the project
would not be counted toward the capital contribution. FCA received
various comments on the contributed capital requirement of the proposed
rulemaking which are addressed below.
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\58\ See FCA Informational Memorandum, Guidance on Addressing
Personal and Intangible Property within Collateral Evaluation
Policies and Procedures (Sec. 614.4245), August 29, 2016. On May
20, 2021, FCA issued a proposed rule on collateral evaluation
requirements (86 FR 27308). FCA's Fall 2023 Unified Agenda and
Review of Significant Regulatory Actions, which the FCA Board
approved on August 14, 2023, indicates that the agency will be
considering a reproposed rule on collateral evaluation requirements
in July 2024. Depending on the eventual outcome of the rulemaking,
FCA's collateral standards could deviate from the FIRREA standards
in the future.
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Cross-Collateralized Real Property and ``Directly Related'' Collateral
The System Comment Letter included a request for FCA to permit
cross-collateralized real property or improvements to qualify as part
of the capital contribution to an HVCRE project.\59\ The Letter
referenced the common practice of System institutions cross-
collateralizing real estate collateral, and particularly the practice
of a related party contributing collateral to support a loan to a YBS
farmer so the farmer can obtain financing. The Letter explained that
while the collateral might not be ``directly related'' to the project
being financed, the collateral is pledged agricultural land integral to
a borrower's overall operation and does not have the same risk profile
as ``unrelated commercial development real estate projects.'' \60\
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\59\ The Farm Credit West, ACA Letter dated January 22, 2022,
reiterated this comment. The CoBank Letter, dated January 20, 2021,
asked for clarification on whether YBS loans, which often cross-
collateralize, would be exempted from the HVCRE definition.
\60\ System Comment Letter dated January 19, 2022, page 4.
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In response to this comment, the Agency is confirming that cross-
collateralized property is permitted to count as a capital contribution
to an HVCRE project. As explained in the preamble to the proposed rule,
the value of the contributed real property must be reduced by the
aggregate amount of any outstanding liens on the property for the
purpose of calculating the 15 percent capital contribution.
In addition, the Agency has reconsidered its regulatory
interpretation in the preamble to the proposed rule that contributed
real property or improvements must be ``directly related'' to the
project. Under the final rule, other real property contributed to a
project does not have to be ``directly related'' to the project to
count as capital contributions for the purpose of the commercial real
property projects exclusion.
In not requiring real property to be ``directly related'' to a
project to count towards the 15 percent capital
[[Page 25125]]
contribution for the purposes of excluding a project from the HVCRE
definition, FCA is deviating from the FBRAs' interpretation of their
final rule. After careful consideration, FCA does not believe that the
relation of real property to a project materially impacts the risk
associated with accessing System collateral. Requiring real property to
be ``directly related'' to the project is therefore not a necessary
safety and soundness criterion.
Readily Marketable Assets
In line with the Interagency Guidelines for Real Estate Lending
Policies,\61\ FCA, in its proposed rule, interpreted the term
``unencumbered readily marketable assets'' to mean insured deposits,
financial instruments, and bullion in which the System institution has
a perfected interest. For assets 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.\62\
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\61\ See 12 CFR part 365, subpart A, Appendix A (FDIC); 12 CFR
part 208, Appendix C (FRB); 12 CFR part 34, Appendix A (OCC).
\62\ This interpretation is consistent with the definitions of
``unencumbered'' and ``marketable'' in FCA's liquidity regulation at
Sec. 615.5134.
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The System Comment Letter asked FCA to clarify how often and to
what extent institutions need to document that assets are readily
marketable.\63\ For the purpose of qualifying as contributed capital
for an HVCRE project, the assets must be deemed readily marketable at
the time of loan origination only. The assessment to determine whether
an asset is readily marketable should address the depth, breadth, and
liquidity of the respective markets as well as other liquidity risk
indicators.
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\63\ The Farm Credit West, ACA Letter dated January 22, 2022,
reiterated this comment verbatim.
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Abundance of Caution Collateral
The System Comment letter also requested that FCA ``make a
distinction on real estate collateral taken as abundance of caution for
purposes of the 15% capital contribution requirement''.\64\ FCA
regulation Sec. 614.4240(a) defines abundance of caution, when used to
describe decisions to require collateral, as circumstances in which
collateral is taken when (1) it is not required by statute, regulation,
or institution policy, and (2) the extension of credit could have been
made without taking the collateral.
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\64\ System Comment Letter dated January 19, 2022, page 4.
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Borrowers must make a 15 percent capital contribution that meets
the criteria outlined in paragraph (2)(iv)(B) of this final rule, among
other requirements, for their loan to qualify for this exclusion from
the HVCRE definition. As discussed above, such collateral can be cross-
collateralized and does not have to be ``directly related'' to the
project. Any collateral used to meet this requirement must satisfy the
specified criteria, including collateral taken from the borrower in an
abundance of caution.
YBS Borrowers
The Agency considered the impact of the contributed capital
requirements on YBS borrowers and, for the reasons discussed above, is
not providing an exclusion for all YBS borrowers. However, the final
rule includes an HVCRE exclusion for loans originated under $500,000,
which will benefit some YBS borrowers.
For the reasons stated above, FCA is adopting, as final, this
provision of the proposed rule.
iii. Value Appraisal
Under paragraph (2)(iv)(B) of FCA's proposed definition of HVCRE
exposures, 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, when an ``as completed'' value
appraisal is not available FCA proposed to permit the use of an ``as
is'' appraisal.\65\ In addition, in its proposed rule FCA proposed to
allow the use of a collateral evaluation of the real property in
situations when the Agency's appraisal regulations \66\ permit
collateral evaluations to be used in lieu of appraisals. As explained
in the proposed rule preamble, FCA's approach to real property
valuation deviates from the FBRAs' regulatory language but is
consistent with their interpretation of the regulation.
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\65\ FCA intends 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.
\66\ See Sec. 614.4260(c), which sets forth the types of real
estate-related transactions that do not require appraisals.
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FCA did not receive any comments on this provision of the proposed
rule and, as such, is adopting it as proposed.
iv. Project
Under paragraph (2)(iv)(B) of FCA's proposed definition of HVCRE
exposures, the 15 percent capital contribution and the appraisal or
collateral evaluation would be measured in relation to a ``project.''
As discussed in the proposed rule preamble, FCA expects 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.
FCA did not receive any comments on this provision of the proposed
rule and, as such, is adopting it as proposed.
e. Loans Originated for Less Than $500,000
FCA is adding an HVCRE exclusion to paragraph (2)(v) of the final
rule for loans originated for less than $500,000. FCA recognizes the
potential administrative burden of tracking loans of this size. As
reported in the System's Annual Information Statement as of December
30, 2022, 85 percent of System borrowers had at least one loan under
$500,000,\67\ for the purpose of HVCRE classification. This exclusion
maintains a balance between providing regulatory relief to System
institutions and limiting the potential risk from HVCRE exposures.
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\67\ Page 57 of the 2022 Annual Information Statement of the
Farm Credit System shows loans under $500,000 account for 85 percent
of System borrowers and 16 percent of System loan volume at December
31, 2022.
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The System Comment Letter asked FCA for consideration of YBS
borrowers in the final rule. The Letter asserted that the loans of YBS
applicants may be defined as HVCRE due to their reliance on third-party
agreements for repayment and the fact that they are often not part of
ongoing farming operations, and it stated that this classification
could be an obstacle for YBS borrowers obtaining financing. The Letter
also asked FCA to consider the impact of the LTV limits and capital
contribution requirements in the commercial real property projects
exclusion on YBS borrowers.
FCA is committed to supporting the FCS's mission to serve YBS
borrowers but the Agency must also ensure the
[[Page 25126]]
safety and soundness of the System. The addition of an exclusion for
loans under $500,000 will benefit some YBS borrowers.\68\ In addition,
many YBS borrowers and System borrowers in general will continue to
have access to loan guarantees through programs such as the Farm
Service Agency guarantee programs. The guaranteed portion of these
loans will continue to receive a reduced risk weight in accordance with
FCA's capital rules and will not be subject to the 150 percent risk
weight for HVCRE exposures.\69\
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\68\ Page 30 of the 2022 Annual Report of the Farm Credit
Administration shows that for all three categories of YBS loans, the
average size of loans outstanding as of December 31, 2022, and of
loans made in 2022 was less than $500,000.
\69\ Under Sec. 628.32(a)(1)(i)(B) the portion of an exposure
that is directly and unconditionally guaranteed by the U.S.
Government, its central bank, or a U.S. Government agency is risk-
weighted at 0-percent. Under 628.32(a)(1)(ii) the portion of an
exposure that is conditionally guaranteed by the U.S. Government,
its central bank, or a U.S. Government agency is risk-weighted at
20-percent.
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For the reasons discussed above, FCA is adding an exclusion for
loans originated for less than $500,000 to the HVCRE definition.
f. Consideration of Additional Exclusions
As detailed below, the System Comment Letter, as well as several
other comment letters, asked FCA to consider various additional
exclusions from the HVCRE definition.\70\ The requested exclusions
included project financing of public and private facilities;
agricultural production or processing facilities with contractual
purchase agreements in place; minor improvements or alterations to real
property; credit facilities where repayment would come from the
borrower's ongoing business; and de minimis levels of financing. FCA
considered each of these requested exclusions as discussed below.
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\70\ The Northwest Letter, dated January 24, 2022, encouraged
FCA, without discussion, to consider all five exceptions proposed in
the System Comment Letter.
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i. Project Financing of Public and Private Facilities
The System Comment Letter (supported by the Northwest Letter), the
CoBank Letter, and the FCBT Letter requested an exclusion from the
HVCRE definition for project financing of public and private
facilities, such as rural infrastructure projects, where contractual
agreements to purchase the product produced are in place before a
facility is constructed. Commenters expressed concern that the proposed
HVCRE definition would include System project financing, and therefore
impact the financing of crucial rural infrastructure projects.
The commenters stated that these projects may not have the
necessary collateral support required by the proposed rule but
highlighted mitigating factors against risk: the credit evaluation of a
project independent of the sponsor, focus on the creditworthiness of
counterparties to the contractual agreements, and the bankruptcy
remoteness of the projects from their sponsors.\71\ They differentiated
System project financings from other forms of corporate financing in
which lenders evaluate the financial condition of corporate entities,
not individual projects. In addition, they stated that the FBRAs'
intent with the HVCRE risk weight was to capture speculative commercial
real estate loans.
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\71\ FCA understands the commenters are referring to projects
that are structured to be legally separate from the sponsor and not
liable for the sponsors' debts in bankruptcy.
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As an initial matter, FCA notes that FCA Bookletter-070--Revised
Capital Treatment for Certain Water and Wastewater Exposures--and
Bookletter-053--Revised Regulatory Capital Treatment for Certain
Electric Cooperatives--assign reduced risk weights to certain project
financing exposures, including some exposures in the construction
phase.\72\ Specifically, Bookletter-070 assigns a reduced risk weight
to certain rural water and wastewater (RWW) construction exposures.\73\
Bookletter-053 assigns a reduced risk weight to certain electric
cooperative construction loans for new baseload power plants. This rule
will not affect the reduced risk weights for the project finance
construction exposures that these bookletters assign, even for
exposures that are HVCRE exposures.
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\72\ The reduced risk weights are lower than those that would
otherwise apply under FCA regulation Sec. 628.32.
\73\ In Section II.C.3. of this preamble--Reclassification as a
Non-HVCRE Exposure--FCA explains revisions it plans to make to BL-
070 before this HVCRE rule becomes effective.
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In response to the comments regarding the standalone nature of
System project financings, FCA agrees that this characteristic can be a
risk mitigant to such projects in isolating them from any financial
difficulties of their sponsors. However, the Agency also believes that
the limited recourse to project sponsors could be to the detriment of
such financings. If the project were to default, the lender could be
limited to accessing the project's collateral, and any contributed
capital, alone. They may not have any recourse to the project sponsor's
assets. More importantly, project finance loans in the construction
phase share many of the same risks as other construction loans
regardless of recourse to project sponsors. These risks are discussed
later in this section. FCA does not therefore believe that the
independent nature of such financings is a sound enough reason alone to
exclude these projects from the HVCRE definition. As discussed in
Section II.C.3 of this preamble--Reclassification as a Non-HVCRE
Exposure--the HVCRE risk weight no longer applies once the project is
reclassified as non-HVCRE.
The System Comment Letter also referenced the focus on the
creditworthiness of contractual agreement counterparties as another
risk mitigant to project financings. FCA agrees the creditworthiness of
counterparties to the contractual agreements entered into by public and
private projects is key to mitigating the risks of these projects.
However, if a project depends on a counterparty's contractual payments
to repay its construction phase debt, the inability of the counterparty
to meet its obligations increases the risk that the project's loan will
default. Counterparty credit risk cannot be avoided and can translate
to elevated risk for construction loan projects heavily reliant on
counterparties for repayment.
FCA believes there are other risk factors to consider in relation
to public and private facility project financing that justify inclusion
of these credits in the HVCRE definition. In addition to the
counterparty credit risk mentioned above, some additional risks include
project delays, cost overruns, project obsolescence, contractor risk,
and risks from shifting market dynamics.
As discussed in Section II.C.1 of this preamble--Scope of HVCRE
Exposure Definition--project delays and cost overruns have been a
particular challenge to System construction loans recently, including
in the project financing sector, and the impact in some cases has been
material. If construction timelines and costs continue to be adversely
affected, such supply chain issues could pose a credit risk to System
institutions. The comment letters did not address these risks.
Further, the reduced risk weights that Bookletter-070 and
Bookletter-053 assign to RWW and electric cooperative construction
exposures, as discussed above, do not support exempting all project
finance construction exposures from HVCRE exposure risk weighting. The
reduced risk weights for RWW and electric cooperative exposures,
including exposures during the construction phase, are supported by
unique characteristics of those
[[Page 25127]]
exposures that may not exist with other project finance exposures.
As Bookletter-070 notes, RWW plays a critical role in agricultural
and rural America, but its infrastructure is aging, and it can be
difficult for rural communities to finance improvements. The services
provided by RWW facilities are essential, which contributes to the
overall strength and stability of the industry. Moreover, many RWW
facilities are able to adjust rates as needed to support repayment,
thus reducing the likelihood of default. FCA determined that a reduced
risk weight for exposures that satisfied specified quantitative and
qualitative safety and soundness criteria would provide more capacity
for System institutions to provide RWW funding without taking on
excessive risk. Similarly, the reduced risk weight for electric
cooperatives that satisfy criteria specified in Bookletter-053 was
supported by the unique characteristics and lower risk profile of the
industry segment. The reduced risk weights assigned by bookletter to
RWW and electric cooperative construction exposures do not support
excluding project finance construction generally from the HVCRE risk
weight.
For the reasons stated above, FCA is not including a general
exclusion for project financing in the final HVCRE rule. However, as
discussed in Section II.5 of this preamble--Impact on Prior FCA Board
Actions--certain project financing loans will not be subject to the
HVCRE risk-weight under the provisions of Bookletter-053 and a revised
Bookletter-070.
ii. Agricultural Production or Processing Facilities With Contractual
Purchase Agreements in Place
The System Comment Letter (supported by the Northwest Letter) asked
for an explicit exclusion from the HVCRE definition for agricultural or
processing facilities where contractual agreements are in place, prior
to construction of the facility, to purchase the output from these
facilities. The System Comment Letter specifically referenced ``loans
to finance construction of poultry or other livestock barns that are
originated with an integrator contract to support the lending
structure.'' \74\ Poultry and other livestock facility construction
projects are subject to the same risks as any construction project,
namely project cost overruns and time delays. These risks are discussed
in Section I.B.3 of this preamble--ADC Lending Risk and HVCRE Risk
Weight. The commenters did not provide a risk-based justification, or
any other justification, for excluding these types of loans from the
HVCRE definition, and FCA does not believe such a justification exists.
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\74\ System Comment Letter dated January 19, 2022, page 5. The
FCBT Letter dated January 24, 2022, reiterated the System Comment
Letter's comment verbatim. The CoBank Letter, dated January 20,
2021, summarized this comment, asking for clarification.
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The System Comment Letter did ask FCA to consider the potential
impact on YBS borrowers by not providing an exclusion for loans with
third-party integrator agreements. As explained in Section II.C.1 of
this preamble--Scope of HVCRE Exposure Definition--a borrower dependent
on payments from an integrator for repayment of debt would meet the
criteria for classification as an HVCRE exposure unless the loan
qualifies for an HVCRE exclusion. As a reminder, if repayment of the
poultry or other livestock construction loan comes from the ongoing
business of the borrower, the loan would not meet the HVCRE criteria.
As discussed above, FCA is not providing an exclusion for all YBS
borrowers. However, some YBS and other borrowers dependent on
integrator agreements for loan repayment will benefit from the
exclusion of loans under $500,000 from the definition of HVCRE in the
final rule. In addition, YBS loans may have access to loan guarantees
to reduce risk weights.
For the reasons stated above, FCA is not adopting an HVCRE
exclusion for agricultural or processing facilities where contractual
agreements are in place.
iii. Minor Improvements or Alterations to Real Property
The System Comment Letter (supported by the Northwest Letter)
stated that FCA's proposed HVCRE definition included construction loans
for ``additions or alterations'' regardless of materiality and
requested an exclusion for minor improvements or alterations to real
property.\75\ The letter indicated that unless a minor improvement
request was a modification to an existing permanent financing it would
be classified as HVCRE.
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\75\ The Farm Credit of Florida, ACA Letter, dated January 21,
2022, repeated the System Comment Letter's comment verbatim.
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As an initial matter, the Letter's suggestion that if a minor
improvement request is a modification to an existing permanent
financing it would not be classified as an HVCRE exposure is not
necessarily correct. As the preamble to the proposed rule explains,
when a System institution modifies a loan or if a project is altered in
a manner that materially \76\ changes the underwriting of a credit
facility, the institution must treat the loan as a new exposure and
must evaluate it to determine whether or not it is an HVCRE
exposure.\77\
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\76\ Material changes may include 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.
\77\ 86 FR 47601, 47606 (August 26, 2021).
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In response to the request for an exclusion for minor improvements
or alterations to real property, the Agency's exclusion for loans under
$500,000 will provide relief for these types of financings. In
addition, the final rulemaking does have an exclusion for improvements
to existing income producing improved real property if the cash flow
generated by the property is sufficient to support the debt service and
expenses of the real property in line with permanent financing
criteria. Unless the loan to make minor improvements or alterations
will be repaid from future income or sale of the project's real
property, it would not fall under the definition of HVCRE.
For the reasons stated above, FCA is not adopting an HVCRE
exclusion for minor improvements or alterations to real property.
iv. Credit Facilities Where Repayment Would Be From the Ongoing
Business of the Borrower
The System Comment Letter (supported by the Northwest Letter)
requested an explicit exclusion for credit facilities where repayment
would come from the borrower's ongoing business.\78\ An explicit
exclusion for these credit facilities is not warranted, because such an
exclusion is clear from the existing regulatory language.
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\78\ The Farm Credit West, ACA Letter dated January 22, 2022
reiterated this comment verbatim.
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The definition of HVCRE in the proposed rule includes a criterion
that credit facilities where repayment is dependent on future income or
the sale of the real estate would be considered HVCRE. Implicit in this
criterion is that repayment from the ongoing business of the borrower
would exclude a credit facility from being classified as HVCRE. In
addition, in the preamble to the proposed rule, FCA explicitly stated
that credit facilities that will be repaid from the borrower's ongoing
business would not be classified as HVCRE.\79\ FCA does not believe
changing the final rule to incorporate an explicit exclusion is
warranted. Instead, FCA reiterates that a credit facility for which
ongoing
[[Page 25128]]
income covers repayment would not meet the definition of HVCRE.
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\79\ 86 FR 47601, 47606 (August 26, 2021).
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For the reasons stated above, FCA is not adopting an HVCRE
exclusion for credit facilities where repayment would be from the
ongoing business of the borrower.
v. De Minimis Financings
The System Comment Letter (supported by the Northwest Letter) asked
FCA to consider an exclusion for a de minimis level of financing
determined by each institution as a percentage of risk funds.\80\ The
final rule includes an exclusion for loans under $500,000, which as
discussed in Section II.C.2.e of this preamble--Loans Originated for
Less Than $500,000--will provide administrative relief without
introducing material risk exposure to the System. The Agency believes
establishing a de minimis level as a percentage of capital or some
other similar metric would allow for higher potential risk exposure
than a dollar threshold would. Large institutions with considerable
capital, for example, would be able to amass potentially material
amounts of HVCRE volume if a capital-based threshold was set. The
$500,000 exclusion would apply to all loans under $500,000 regardless
of an institution's size or capital levels.
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\80\ The Farm Credit of Florida, ACA Letter, dated January 21,
2022, and the Farm Credit West, ACA Letter, dated January 22, 2022,
repeated the System Comment Letter's comment verbatim.
---------------------------------------------------------------------------
For the reasons stated above, FCA is not adopting an HVCRE
exclusion for de minimis financings.
3. 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. Each System institution should have prudent, clear, and
measurable underwriting standards, which we may review through the
examination process.
The System Comment Letter requested FCA clarify its expectations
for when an HVCRE project can be reclassified. The letter asked for
clarification of ``the period that follows project completion to
determine whether a projected cash flow is acceptable for purposes of
reclassification.'' \81\ In addition, the letter requested further
guidance on how to calculate projected cash flows for a property
``owned by the business'' when these are not ``separately provided by
the borrower''.\82\
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\81\ System Comment Letter, page 4.
\82\ Id.
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As stated in the proposed rule, institutions should defer to their
loan underwriting criteria for permanent financings when determining if
an HVCRE exposure is generating sufficient cash flow to support the
debt service and expenses of the real property. FCA does not have an
expectation for a specific period following project completion to
demonstrate adequate cash flows. Such a criterion should be clearly
stated in an institution's loan underwriting standards. Similarly, the
Agency is not specifying in the final rule how to calculate cash flows.
Regardless of how cash flow information is presented by a borrower, the
institution should have processes in place to adequately analyze and
project cash flows.
FCA is adopting this part of the proposed rule without change.
4. Applicability Only to Loans Made After January 1, 2025
In consideration of the changes this rule would require, only loans
made after January 1, 2025, the planned effective date of this rule,
would be subject to the HVCRE risk-weighting requirements. Loans made
prior to January 1, 2025 could continue to be risk-weighted as they are
under the pre-existing version of the rule.
After January 1, 2025, 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.
5. Impact on Prior FCA Board Actions
Existing FCA Bookletter BL-070 authorizes System institutions to
assign a 50- or 75-percent risk weight for RWW facilities that satisfy
certain criteria, but it does not permit these risk weights for
exposures when a RWW facility is not fully operational due to initial
construction or major renovation. RWW exposures subject to a 50- or 75-
percent risk weight under BL-070 will continue to receive these risk
weights after this HVCRE rule becomes effective.
Bookletter-070 currently provides that exposures not subject to the
50- or 75-percent risk weight are assigned risk weights in accordance
with Part 628 of FCA's regulations. Because this HVCRE rule is not yet
in effect, these exposures are currently risk weighted at 100-percent
as corporate exposures under Sec. 628.32(f)(1) when they are in the
construction phase. However, as this bookletter is currently written,
once the HVCRE risk weight becomes effective such construction
exposures would be assigned the HVCRE risk weight if the HVCRE
definition were met and no exclusions applied.
Before the rule's planned effective date of January 1, 2025 (which
is before BL-070's existing sunset date of November 2025), FCA plans to
revise BL-070 to provide that RWW construction exposures not subject to
a 50-or 75-percent risk weight under the bookletter will continue to be
risk-weighted as corporate exposures. FCA plans to revise the risk
weight of these exposures because of the unique characteristics of RWW
exposures discussed above.
Similarly, electric cooperative exposures assigned 20- or 50-
percent risk weights under FCA Bookletter BL-053, including exposures
to some power plants that are in the construction phase, will continue
to receive these risk weights under the bookletter even after this rule
becomes effective. Under the bookletter, electric cooperative exposures
that are not assigned a 20- or 50-percent risk weight are subject to
the ``current'' (as of the 2007 adoption of the bookletter) regulatory
risk weight under former Sec. 615.5211,\83\ which was 100 percent.\84\
Therefore, under the bookletter, electric cooperative construction
exposures that are not assigned a 20- or 50-percent risk weight will be
assigned a 100 percent risk weight and will not be subject to risk
weights in Part 628 (including the new HVCRE risk weight).
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\83\ FCA rescinded Sec. 615.5211 when the capital rule it
adopted in 2016, including the risk weights in Sec. 628.32, became
effective on January 1, 2017.
\84\ Under former Sec. 615.5211(d) as it existed in 2007, the
100-percent risk weight category comprised standard risk assets such
as those typically found in a loan or lease portfolio. In addition,
former Sec. 615.5211(d)(1) provided that the 100-percent risk
weight category included all claims on private obligors that were
not included in another category and Sec. 615.5211(12) provided
that the category included all other assets not specified elsewhere.
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[[Page 25129]]
III. Regulatory Analysis
A. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), FCA hereby certifies the final 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.
B. Congressional Review Act
Under the provisions of the Congressional Review Act (5 U.S.C. 801
et seq.), the Office of Management and Budget's Office of Information
and Regulatory Affairs has determined that this final rule is not a
``major rule'' as the term is defined at 5 U.S.C. 804(2).
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, the Farm Credit
Administration amends part 628 of chapter VI, title 12 of the Code of
Federal Regulations 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, as amended
by sec. 301(a), Pub. L. 103-399, 102 Stat 989, 993 (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.
(v) Loans originated for less than $500,000.
(3) An HVCRE exposure does not include any loan made prior to
January 1, 2025.
(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
[[Page 25130]]
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 read as
follows:
Sec. 628.63 Disclosures.
* * * * *
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 limit
Loan category (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: March 29, 2024.
Ashley Waldron,
Secretary to the Board, Farm Credit Administration.
[FR Doc. 2024-07060 Filed 4-9-24; 8:45 am]
BILLING CODE 6705-01-P