84 FR 35344 - Regulatory Capital Rules: Treatment of Land Development Loans for the Definition of High Volatility Commercial Real Estate Exposure

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) are issuing a notice of proposed rulemaking (proposal) to seek comment on the treatment of loans that finance the development of land for purposes of the one- to four-family residential properties exclusion in the definition of high volatility commercial real estate (HVCRE) exposure in the agencies' regulatory capital rule. This proposal expands upon the notice of proposed rulemaking (HVCRE NPR) issued on September 28, 2018, which proposed to revise the definition of HVCRE exposure in the regulatory capital rule to conform to the statutory definition of ``high volatility commercial real estate acquisition, development, or construction (HVCRE ADC) loan,'' in accordance with section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).

[Federal Register Volume 84, Number 141 (Tuesday, July 23, 2019)]
[Proposed Rules]
[Pages 35344-35352]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2019-15332]


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

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

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Federal Register / Vol. 84, No. 141 / Tuesday, July 23, 2019 / 
Proposed Rules

[[Page 35344]]



DEPARTMENT OF TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

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

FEDERAL RESERVE SYSTEM

12 CFR Part 217

[Regulation Q; Docket No. R-1669]
RIN 7100-AF53

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 324

RIN 3064-AF06


Regulatory Capital Rules: Treatment of Land Development Loans for 
the Definition of High Volatility Commercial Real Estate Exposure

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency, the Board of 
Governors of the Federal Reserve System, and the Federal Deposit 
Insurance Corporation (collectively, the agencies) are issuing a notice 
of proposed rulemaking (proposal) to seek comment on the treatment of 
loans that finance the development of land for purposes of the one- to 
four-family residential properties exclusion in the definition of high 
volatility commercial real estate (HVCRE) exposure in the agencies' 
regulatory capital rule. This proposal expands upon the notice of 
proposed rulemaking (HVCRE NPR) issued on September 28, 2018, which 
proposed to revise the definition of HVCRE exposure in the regulatory 
capital rule to conform to the statutory definition of ``high 
volatility commercial real estate acquisition, development, or 
construction (HVCRE ADC) loan,'' in accordance with section 214 of the 
Economic Growth, Regulatory Relief, and Consumer Protection Act 
(EGRRCPA).

DATES: Comments must be received by August 22, 2019.

ADDRESSES: Comments should be directed to:
    OCC: You may submit comments to the OCC by any of the methods set 
forth below. Commenters are encouraged to submit comments through the 
Federal eRulemaking Portal or email, if possible. Please use the title 
``Regulatory Capital Rules: Treatment of Land Development Loans for the 
Definition of High Volatility Commercial Real Estate Exposure'' to 
facilitate the organization and distribution of the comments. You may 
submit comments by any of the following methods:
     Federal eRulemaking Portal--``regulations.gov'': Go to 
www.regulations.gov. Enter ``Docket ID OCC-2018-0026'' in the Search 
Box and click ``Search.'' Click on ``Comment Now'' to submit public 
comments. Click on the ``Help'' tab on the Regulations.gov home page to 
get information on using Regulations.gov, including instructions for 
submitting public comments.
     Email: [email protected].
     Mail: Chief Counsel's Office, Office of the Comptroller of 
the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218, 
Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2018-0026'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish them on the 
Regulations.gov website without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not include any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to 
www.regulations.gov. Enter ``Docket ID OCC-2018-0026'' in the Search 
box and click ``Search.'' Click on ``Open Docket Folder'' on the right 
side of the screen and then ``Comments.'' Comments and supporting 
materials can be filtered by clicking on ``View all documents and 
comments in this docket'' and then using the filtering tools on the 
left side of the screen. Click on the ``Help'' tab on the 
Regulations.gov home page to get information on using Regulations.gov. 
The docket may be viewed after the close of the comment period in the 
same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect 
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For 
security reasons, the OCC requires that visitors make an appointment to 
inspect comments. You may do so by calling (202) 649-6700 or, for 
persons who are hearing impaired, TTY, (202) 649-5597. Upon arrival, 
visitors will be required to present valid government-issued photo 
identification and submit to security screening in order to inspect 
comments.
    Board: You may submit comments, identified by Docket No. R-1669, by 
any of the following methods:
     Agency website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551. All public comments will be made available on the 
Board's website at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or 
to remove personally identifiable information at the commenter's 
request. Accordingly,

[[Page 35345]]

comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room 146, 1709 New York Avenue, Washington, DC 20006 
between 9:00 a.m. and 5:00 p.m. on weekdays.
    FDIC: You may submit comments, identified by RIN 3064-AF06, by any 
of the following methods:
     Agency website: https://www.fdic.gov/regulations/laws/federal/index.html. Follow instructions for submitting comments on the 
FDIC website.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW, Washington, DC 20429.
     Hand Delivered/Courier: Comments may be hand-delivered to 
the guard station at the rear of the 550 17th Street Building (located 
on F Street) on business days between 7:00 a.m. and 5:00 p.m.
     Email: [email protected]. Include RIN 3064-AF06 on the 
subject line of the message.
     Public Inspection: All comments received must include the 
agency name and RIN 3064-AF06 for this rulemaking. All comments 
received will be posted without change to https://www.fdic.gov/regulations/laws/federal/index.html, including any personal information 
provided. Paper copies of public comments may be ordered from the FDIC 
Public Information Center, 3501 North Fairfax Drive, Room E-1002, 
Arlington, VA 22226, or by telephone at (877) 275-3342 or (703) 562-
2200.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Mark Ginsberg, Senior Risk Expert, or Benjamin Pegg, Risk 
Expert, Capital and Regulatory Policy, (202) 649-6370; or Carl 
Kaminski, Special Counsel, or Rima Kundnani, Attorney, Chief Counsel's 
Office, (202) 649-5490, for persons who are deaf or hearing impaired, 
TTY, (202) 649-5597, Office of the Comptroller of the Currency, 400 7th 
Street SW, Washington, DC 20219.
    Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Elizabeth MacDonald, Manager, (202) 475-6216; Andrew Willis, Lead 
Financial Institutions Policy Analyst, (202) 912-4323; Matthew 
McQueeney, Senior Financial Institutions Policy Analyst (202) 452-2942; 
or Benjamin McDonough, Assistant General Counsel (202) 452-2036; David 
Alexander, Counsel, (202) 452-2877, Legal Division, Board of Governors 
of the Federal Reserve System, 20th and C Streets NW, Washington, DC 
20551. For the hearing impaired only, Telecommunication Device for the 
Deaf (TDD), (202) 263-4869.
    FDIC: Benedetto Bosco, Chief, Capital Policy Section; 
[email protected]; David Riley, Senior Policy Analyst, Capital Policy 
Section; [email protected]; Michael Maloney, Senior Policy Analyst, 
[email protected]; [email protected]; Capital Markets Branch, 
Division of Risk Management Supervision, (202) 898-6888; Beverlea S. 
Gardner, Senior Examination Specialist, [email protected], Policy and 
Program Development; Michael Phillips, Counsel, [email protected]; or 
Catherine Wood, Acting Supervisory Counsel, [email protected]; 
Supervision and Legislation Branch, Legal Division, Federal Deposit 
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Summary of Proposal
III. Regulatory Analyses
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act Analysis
    C. Plain Language
    D. OCC Unfunded Mandates Reform Act of 1995 Determination
    E. Riegle Community Development and Regulatory Improvement Act 
of 1994

I. Background

    On September 28, 2018, the Office of the Comptroller of the 
Currency (OCC), the Board of Governors of the Federal Reserve System 
(Board), and the Federal Deposit Insurance Corporation (FDIC) 
(collectively, the agencies) published a notice of proposed rulemaking 
in the Federal Register (HVCRE NPR) to revise the high volatility 
commercial real estate (HVCRE) exposure definition in section 2 of the 
capital rule \1\ to conform to the statutory definition of ``high 
volatility commercial real estate acquisition, development, or 
construction (HVCRE ADC) loan'' in accordance with section 214 of the 
Economic Growth, Regulatory Relief, and Consumer Protection Act 
(EGRRCPA).\2\
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    \1\ The Board and OCC issued a joint final rule on October 11, 
2013 (78 FR 62018), and the FDIC issued a substantially identical 
interim final rule on September 10, 2013 (78 FR 55340). On April 14, 
2014 (79 FR 20754), the FDIC adopted the interim final rule as a 
final rule with no substantive changes.
    \2\ See 12 CFR 217.2 (Board); 12 CFR 3.2 (OCC); 12 CFR 324.2 
(FDIC). Section 214 of the EGRRCPA generally defines an HVCRE ADC 
Loan as a credit facility secured by land or improved real property 
that, primarily finances, has financed, or refinances the 
acquisition, development, or construction of real property; has the 
purpose of providing financing to acquire, develop, or improve such 
real property into income-producing real property; and is dependent 
upon future income or sales proceeds from, or refinancing of, such 
real property for the repayment of such credit facility.
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    Consistent with section 214, the agencies proposed in the HVCRE NPR 
to exclude credit facilities that finance the acquisition, development, 
or construction of one- to four-family residential properties from the 
definition of HVCRE exposure. In the HVCRE NPR, the agencies also 
invited comment on whether it would be appropriate to include one-to 
four-family ``lot development loans'' within the scope of the one- to 
four-family residential properties exclusion from the definition of 
HVCRE exposure. Some commenters to the HVCRE NPR supported aligning the 
one- to four-family residential properties exclusion with the treatment 
of one- to four-family residential construction loans as reported in 
the Call Report and FR Y-9C. Other commenters to the HVCRE NPR 
supported the exclusion of lot development loans from the definition of 
HVCRE exposure.
    After reviewing the comments related to lot development loans, the 
agencies believe that the regulatory capital treatment of such loans 
warrants further consideration and clarification before finalizing the 
definition of an HVCRE exposure. The term ``lot development loan'' is 
not defined in the capital rule. The agencies have considered the use 
of the term ``lot development loan'' or ``land development loan'' for 
purposes of the one-to-four-family residential properties exclusion to 
the definition of HVCRE exposure, and are proposing to use the term 
``land development,'' which is described in the instructions to the 
Call Report and FR Y-9C as a loan that finances the process of 
improving land, such as laying sewers, water pipes, and similar 
improvements to prepare the land for erecting new structures. 
Accordingly, the agencies are issuing this notice of proposed 
rulemaking (proposal), which expands upon the HVCRE NPR, to seek 
comment on the treatment of land development loans for the purpose of 
the one- to four-family residential properties exclusion from the 
definition of HVCRE exposure.
    Section 214 became effective upon enactment of the EGRRCPA. 
Accordingly, on July 6, 2018, the agencies issued a statement 
(interagency statement), advising banking organizations that, when 
determining which loans should be subject to a heightened risk weight, 
they may choose to continue to apply the current regulatory definition 
of HVCRE exposure, or they may choose to apply

[[Page 35346]]

the heightened risk weight only to those loans they reasonably believe 
meet the definition of ``HVCRE ADC loan'' set forth in section 214 of 
the EGRRCPA.\3\ Until the agencies take further action, banking 
organizations are advised to reference the interagency statement for 
purposes of the HVCRE exposure definition and regulatory reporting.
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    \3\ Board, FDIC, and OCC, Interagency statement regarding the 
impact of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180706a1.pdf. (last visited August 21, 
2018).
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II. Summary of Proposal

    The agencies are expanding the HVCRE NPR to revise the definition 
of HVCRE exposure in the capital rule by adding a new paragraph that 
provides that the exclusion for one- to four-family residential 
properties would not include credit facilities that solely finance land 
development activities, such as the laying of sewers, water pipes, and 
similar improvements to land, without any construction of one- to four-
family residential structures. In order for a loan to be eligible for 
this exclusion, the credit facility would be required to include 
financing for construction of one- to four-family residential 
structures.
    Credit facilities that combine the financing of land development 
and the construction of one- to four-family residential structures 
would qualify for the one- to four-family residential properties 
exclusion. This revision would generally align with the instructions 
set forth in the Call Report and FR Y-9C on line 1.a.(1) of Schedules 
RC-C and HC-C. Further, combination land acquisition and construction 
loans on one- to four-family residential properties, regardless of the 
current stage of construction or development, would qualify for the 
one- to four-family residential properties exclusion as these exposures 
are reported in the Call Report and FR Y-9C on line 1.a.(1) of 
Schedules RC-C and HC-C. The agencies believe such combination loans 
generally pose less risk than loans that solely finance land 
development. Consistent with the HVCRE NPR, the proposal would maintain 
that ``other land loans'' (generally loans secured by vacant land, 
except for land known to be used for agricultural purposes) would 
continue to be included within the scope of the revised HVCRE exposure 
definition. Furthermore, under the proposal, combination land 
acquisition loans and land development loans that do not include 
financing for construction of one- to four-family residential 
structures, would not qualify for the one- to four-family residential 
properties exclusion. Under the proposal, a facility that solely 
finances land development would be categorized as an HVCRE exposure, 
unless the exposure meets another exclusion from the revised HVCRE 
exposure definition.
    Allowing banking organizations to apply a consistent definition of 
one- to four-family residential property and land development in this 
manner would simplify reporting requirements, reduce burden, and 
promote uniform application of the capital rule. Additionally, 
supervisory experience has demonstrated that certain acquisition, 
development, and construction loan exposures present risks for which 
the agencies believe banking organizations should hold additional 
capital. Supervisors generally consider land development loans to 
present elevated risk as compared to construction loans. For example, 
while the loan-to-value ratio is only one of several pertinent credit 
factors to be considered when underwriting a real estate loan, the 
agencies have established in their real estate lending standards more 
stringent supervisory loan-to-value ratios for land development loans 
(75 percent) than for construction loans (80 or 85 percent depending on 
property type) because of the elevated credit risk in land development 
loans.\4\ Furthermore, in some cases, land development loans may be 
made for speculative purposes, generate no cash flow, and require other 
sources of cash to service the debt. Based on the risks arising from 
land development loans, the agencies believe it would be imprudent to 
include loans that solely finance land development to prepare it for 
erecting new structures as part of the one- to four-family residential 
properties exclusion from the HVCRE exposure definition.
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    \4\ See Board, OCC, and FDIC, Interagency Guidelines For Real 
Estate Lending Policies (real estate lending standards), 12 CFR part 
208 Appendix C (Board); 12 CFR part 34 Appendix A (OCC); 12 CFR part 
365 Appendix A (FDIC).
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    Consistent with the HVCRE NPR, the definition of HVCRE exposure 
would provide that the determination of whether a land development loan 
is considered an HVCRE exposure would be made at a loan's origination. 
Therefore, with respect to land development loans originated prior to 
the effective date of this rulemaking, the agencies would not expect 
banking organizations to reevaluate those exposures against the revised 
definition of HVCRE exposure. However, new land development loans 
originated after the effective date of this rulemaking would need to be 
evaluated in accordance with the revised HVCRE exposure definition for 
the purpose of the one- to four-family residential properties 
exclusion.
    Question 1: The agencies invite comment on the exclusion of credit 
facilities that finance land development without any construction of 
one- to four-family residential structures from the one- to four-family 
residential properties exclusion in the HVCRE exposure definition. What 
are the advantages and disadvantages of not permitting such land 
development loans to qualify for the one- to four-family residential 
properties exclusion in the revised HVCRE exposure definition? The 
agencies welcome any quantitative analysis that could estimate the 
approximate economic impact of including or excluding such land 
development loans from the one- to four-family residential properties 
exclusion.
    Question 2: The agencies invite comment on the proposed change to 
the rule text of the HVCRE exposure definition including whether it is 
sufficiently clear. What interpretation issues might arise from the 
proposed change to the HVCRE exposure definition? What additional 
clarity is needed to facilitate the consistent application of this 
proposed change to the rule text of the HVCRE exposure definition in 
the context of land development?

III. Regulatory Analyses

A. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with 
the requirements of the PRA, the agencies may not conduct or sponsor, 
and the respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The OMB control number for the OCC is 
1557-0318, Board is 7100-0313, and FDIC is 3064-0153. These information 
collections relate to the regulatory capital rules for each agency. 
However, the agencies expect that these information collections will 
not be affected by this proposed rule and therefore no submissions will 
be made under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and 
section 1320.11 of the OMB's implementing regulations (5 CFR 1320) for 
each of the agencies' regulatory capital rules.

[[Page 35347]]

    The proposed rule also requires changes to the Call Reports (FFIEC 
031, FFIEC 041, and FFIEC 051; OMB Nos. 1557-0081 (OCC), 7100-0036 
(Board), and 3064-0052 (FDIC)) and Risk-Based Capital Reporting for 
Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 
101; OMB Nos. 1557-0239 (OCC), 7100-0319 (Board), and 3064-0159 
(FDIC)), and Consolidated Financial Statements for Holding Companies 
(FR Y-9C; OMB No. 7100-0128), which will be addressed in separate 
Federal Register notices.

B. Regulatory Flexibility Act Analysis

    OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), 
requires an agency, in connection with a proposed rule, to prepare an 
Initial Regulatory Flexibility Analysis describing the impact of the 
rule on small entities (defined by the SBA for purposes of the RFA to 
include commercial banks and savings institutions with total assets of 
$550 million or less and trust companies with total assets of $38.5 
million of less) or to certify that the proposed rule would not have a 
significant economic impact on a substantial number of small entities.
    As of June 30, 2018, the OCC supervises 886 small entities.\5\
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    \5\ The OCC calculated the number of small entities using the 
SBA's size thresholds for commercial banks and savings institutions, 
and trust companies, which are $550 million and $38.5 million, 
respectively. Consistent with the General Principles of Affiliation, 
13 CFR 121.103(a), the OCC counted the assets of affiliated 
financial institutions when determining whether to classify a 
national bank or Federal savings association as a small entity.
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    The proposed rule applies to all OCC-supervised depository 
institutions. Currently, 211 small OCC-supervised institutions report 
HVCRE exposures. Therefore, the rule will affect a substantial number 
of small entities. However, the OCC does not find that the impact of 
this proposed rule will be economically significant.
    Therefore, the OCC certifies that the proposed rule will not have a 
significant economic impact on a substantial number of OCC-supervised 
small entities.
    The proposed rule impacts two principal areas: (1) The capital 
impact associated with implementing revisions to the one- to four-
family residential properties exclusion in the revised HVCRE exposure 
definition and, (2) the impact associated with the time required to 
update policies and procedures. As described in the Supplementary 
Information section in the preamble to this proposed rule, the OCC 
believes the change to the treatment of land development loans for the 
purpose of the one- to four-family residential properties exclusion in 
the definition of HVCRE exposure will result in an increase in future 
required capital, once existing HVCRE land development loans roll over. 
This is because the proposed rule does not require re-evaluation of 
existing land development loans and would only apply to newly issued 
land development loans after the effective date of this rulemaking. 
This will serve to minimize the compliance burden for OCC-supervised 
entities. The OCC finds that the amount of total capital that small 
OCC-supervised institutions would need in the future in order to 
maintain their total risk-based capital ratios, as of March 31, 2018, 
would increase by approximately $33.97 million.
    In addition to facing increased capital requirements, OCC-
supervised banks may face one-time compliance costs associated with 
updating policies and procedures to identify whether a newly issued 
land development loan is eligible for the one- to four-family 
residential properties exclusion in the revised HVCRE exposure 
definition. Based on the OCC's supervisory experience, OCC staff 
estimates that it would take an OCC-supervised institution, on average, 
a one-time investment of one business day, or 8 hours, to update 
policies and procedures to identify whether a newly issued land 
development loan is eligible for the one- to four-family residential 
properties exclusion in the revised HVCRE exposure definition.
    The OCC's threshold for a significant effect is whether cost 
increases associated with a rule are greater than or equal to either 5 
percent of a small bank's total annual salaries and benefits or 2.5 
percent of a small bank's total non-interest expense. OCC-supervised 
institutions would incur an estimated one-time compliance cost of $912 
per institution (8 hours x $114 per hour).\6\ OCC staff finds that the 
overall impact, which includes the future increase in required capital 
and the cost of complying with the proposed rule, will not exceed 
either of the thresholds for a significant impact on any OCC-supervised 
small entities.
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    \6\ Under the assumption that banks would need twice the amount 
of time to update policies and procedures, the estimated compliance 
cost is $1,824 per institution (16 hours x $114 per hour).
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    For this reason, the OCC certifies that the proposed rule will not 
have a significant economic impact on a substantial number of OCC-
supervised small entities.
    Board: The RFA requires an agency to either provide an initial 
regulatory flexibility analysis with a proposal or certify that the 
proposal will not have a significant impact on a substantial number of 
small entities. Under regulations issued by the SBA, a small entity 
includes a bank, bank holding company, or savings and loan holding 
company with assets of $550 million or less (small banking 
organization).\7\ On average during 2018, there were approximately 
3,191 small bank holding companies, 204 small savings and loan holding 
companies, and 549 small state member banks.
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    \7\ See 13 CFR 121.201. Effective July 14, 2014, the SBA revised 
the size standards for banking organizations to $550 million in 
assets from $500 million in assets. 79 FR 33647 (June 12, 2014).
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    The Board has considered the potential impact of the proposed rule 
on small entities in accordance with the RFA. Based on the Board's 
analysis, and for the reasons stated below, the Board believes that 
this proposed rule will not have a significant economic impact on a 
substantial number of small entities. Nevertheless, the Board is 
providing an initial regulatory flexibility analysis with respect to 
this proposed rule. A final regulatory flexibility analysis will be 
conducted after comments received during the public comment period have 
been considered. The Board welcomes comment on all aspects of its 
analysis. In particular, the Board requests that commenters describe 
the nature of any impact on small entities and provide empirical data 
to illustrate and support the extent of the impact.
    As discussed in this SUPPLEMENTARY INFORMATION, the Board has 
proposed to revise the definition of HVCRE exposure to conform to the 
statutory definition of ``high volatility commercial real estate 
acquisition, development, or construction (HVCRE ADC) loan,'' in 
accordance with section 214 of EGRRCPA. The proposal would clarify that 
certain land development loans as defined in the Call Report and FR Y-
9C instructions are included in the revised definition of HVCRE 
exposure.
    The proposal would apply to all state member banks, as well as all 
bank holding companies and savings and loan holding companies that are 
subject to the Board's capital rule. Certain bank holding companies, 
and savings and loan holding companies are excluded from the 
application of the Board's capital rule. In general, the Board's 
capital rule only applies to bank holding companies and savings and 
loan holding companies that are not subject to the Board's Small Bank 
Holding Company and Savings and Loan Holding Company Policy Statement, 
which applies to bank holding

[[Page 35348]]

companies and savings and loan holding companies with less than $3 
billion in total assets that also meet certain additional criteria.\8\ 
Thus, most bank holding companies and savings and loan holding 
companies that would be subject to the proposed rule exceed the $550 
million asset threshold at which a banking organization would qualify 
as a small banking organization.
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    \8\ See 12 CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225, 
appendix C; 12 CFR 238.9.
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    In assessing whether the proposal rule would have a significant 
impact on a substantial number of small entities, the Board has 
considered the proposal's capital impact as well as its compliance, 
administrative, and other costs. As of December 31, 2018, there were 
157 small state member banks and three small bank or savings and loan 
holding companies that reported combined HVCRE exposures totaling $611 
million and 1-4 family residential construction loans totaling $1.2 
billion. To estimate the capital impact of the proposal, the Board 
assumed a range of 75 to 95 percent of 1-4 family residential 
construction loans would remain exempt from the revised definition of 
HVCRE exposure. Based on this assumption, the difference in required 
capital would be in the range of $7 million to $36 million for small 
banking organizations supervised by the Board.
    In addition to capital impact, the Board has considered whether the 
compliance, administrative, and other costs associated with the 
proposed rule. Given that the proposed rule does not impact the 
recordkeeping and reporting requirements that affected small banking 
organizations are currently subject to, there would be no change to the 
information that small banking organizations must track and report. 
Some small banking organizations may incur costs associated with 
updating internal policies to reflect the revised definition of HVCRE 
exposure, including the treatment of land development loans. However, 
because the proposal would clarify the treatment of HVCRE exposure and 
land development loans that may currently be in effect at many small 
banking organizations, the Board does not anticipate that a substantial 
number of small banking organizations will incur significant costs to 
update internal systems or policies to reflect the revised HVCRE 
exposure definition.
    The Board does not believe that the proposed rule duplicates, 
overlaps, or conflicts with any other Federal rules. In addition, there 
are no significant alternatives to the proposed rule. In light of the 
foregoing, the Board does not believe that the proposed rule, if 
adopted in final form, would have a significant economic impact on a 
substantial number of small entities.
    FDIC: The RFA generally requires that, in connection with a 
proposed rulemaking, an agency prepare and make available for public 
comment an initial regulatory flexibility analysis describing the 
impact of the proposed rule on small entities.\9\ However, a regulatory 
flexibility analysis is not required if the agency certifies that the 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. The SBA has defined ``small 
entities'' to include banking organizations with total assets of less 
than or equal to $550 million that are independently owned and operated 
or owned by a holding company with less than or equal to $550 million 
in total assets.\10\ Generally, the FDIC considers a significant effect 
to be a quantified effect in excess of 5 percent of total annual 
salaries and benefits per institution, or 2.5 percent of total non-
interest expenses. The FDIC believes that effects in excess of these 
thresholds typically represent significant effects for FDIC-supervised 
institutions. For the reasons described below and under section 605(b) 
of the RFA, the FDIC certifies that this proposed rule will not have a 
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \9\ 5 U.S.C. 601 et seq.
    \10\ The SBA defines a small commercial bank to have $550 
million or less in total assets. See 13 CFR 121.201 (as amended, 
effective December 2, 2014). The SBA requires agencies to ``consider 
assets of affiliated and acquired financial institutions reported in 
the previous four quarters.'' See 13 CFR 121.104. Therefore, the 
FDIC utilizes merger-adjusted and affiliated assets, averaged over 
the previous four quarters, to identify whether a bank is a ``small 
entity'' for the purposes of RFA.
---------------------------------------------------------------------------

    The FDIC supervises 3,489 depository institutions,\11\ of which 
2,674 are considered small entities for the purposes of RFA.\12\ 
According to recent data, 2,145 small, FDIC-supervised institutions 
report holding some volume of ADC loans for one- to four-family 
residential properties. Therefore, the FDIC estimates that the proposed 
rule is likely to affect a substantial number, 2,145 (80.2 percent), of 
small, FDIC-supervised institutions.\13\
---------------------------------------------------------------------------

    \11\ FDIC-supervised institutions are set forth in 12 U.S.C. 
1813(q)(2).
    \12\ FDIC Call Report, December 31st, 2018.
    \13\ Id.
---------------------------------------------------------------------------

    This proposed rule would require institutions to treat some future 
land development loans for one- to four-family residential properties 
as HVCRE, which means they would receive a risk weight of 150 percent 
rather than 100 percent, unless such loans would qualify for a 
different exclusion. Based on comments received by the agencies, there 
is some uncertainty about the treatment for certain land development 
loans under the proposed definition of HVCRE. This proposed rule 
clarifies the treatment for certain land development loans and is 
likely to result in increased risk-weighted assets, and therefore 
increased risk-based capital requirements, for affected institutions. 
The effects of the proposed rule will be realized over the ensuing 
years by affected institutions as they make more land development 
loans. The Call Report does not collect data on land development loans 
in a standalone line item. However, such loans would be included in the 
category of one- to four-family residential construction loans on 
Schedule RC-C Line 1.a(1) if they include financing for the 
construction of one- to four-family residential structures. Residential 
mortgage exposures receive a 50 percent risk weight if they are secured 
by prudently-underwritten first liens on one- to four-family 
residential properties, while other residential mortgage exposures 
receive a 100 percent risk weight.\14\ Therefore, the 100 percent risk 
weight category of residential mortgage exposures includes land 
development loans, other construction loans, as well as credit lines 
secured by home equity and mortgage loans secured by junior liens on 
one- to four-family residential properties. The potential effects of 
the proposed increase in risk-weight treatment for certain land 
development loans is difficult to quantify as it depends on the future 
volume of such lending. Assuming that current loan volume is an 
accurate proxy for future lending activity, to determine the maximum 
potential capital effect of the proposed rule, the FDIC assumes that 
all construction loans currently reported by FDIC-supervised 
institutions that are secured by one- to four-family residential 
properties are land development loans. The FDIC also assumes that the 
ratio of currently reported residential construction loans to currently 
reported total residential mortgage loans (other than those secured by 
first liens of one- to four-family residential properties) is the same 
for each institution's 100 percent risk-weight category of residential 
mortgage exposures as it is for each institution's loan portfolio, and 
that covered institutions would maintain the same risk-based capital 
ratio after the proposed rule goes into effect. Using those 
assumptions, the FDIC finds that the amount of total capital that small

[[Page 35349]]

FDIC-supervised institutions would need in the future in order to 
maintain their current total risk-based capital ratios would increase 
by $259.20 million (0.50 percent); the amount of tier 1 capital 
institutions would need in order to maintain their current tier 1 risk-
based capital ratios would increase by $242.8 million (0.50 percent); 
and the amount of common equity tier 1 capital institutions would need 
in order to maintain their current common equity tier 1 risk-based 
capital ratios would increase by $242.5 million (0.50 percent). The 
maximum estimated potential future capital increase of $259.20 million 
for small, FDIC-supervised institutions consistent with maintaining 
their current risk-based capital ratios, amounts to an average increase 
in capital of $120,839 per affected institution.\15\
---------------------------------------------------------------------------

    \14\ 78 FR 55340.
    \15\ FDIC Call Report, December 31st, 2018.
---------------------------------------------------------------------------

    The change in required capital precipitated by the proposed rule 
will almost certainly be less than the maximum estimated amount, since 
not all current credit facilities that finance land development without 
any construction of one- to four-family residential properties would 
qualify for a higher risk weight. The estimated maximum increase in 
capital would represent less than five percent of total current risk-
based capital for all but 30 small FDIC-supervised institutions, and 
less than ten percent of risk-based capital for all but 11 FDIC-
supervised institutions.\16\ Since land development loans are not 
reported separately on the Call Report, they could comprise anywhere 
from zero to 100 percent of residential construction loans for each 
institution.
---------------------------------------------------------------------------

    \16\ Id.
---------------------------------------------------------------------------

    The proposed rule could pose some administrative costs for covered 
institutions associated with reviewing land development loan 
portfolios. It is difficult to accurately estimate the costs that each 
institution will incur in order to conduct reviews since it depends on 
each institution's volume of land development loans. However, assuming 
that each institution requires 40 hours of labor to adopt new policies 
and procedures for reviewing new lot development loans, and assuming an 
hourly cost of $83.23,\17\ the estimated administrative costs resulting 
from this proposal would be $3,329.20 per institution or $7,141,134 for 
all small, FDIC-supervised institutions. These administrative costs 
amount to less than two percent of annualized salary expense, and less 
than one percent of annualized noninterest expense, for all small, 
FDIC-supervised institutions directly affected by the proposed 
rule.\18\ Therefore, this aspect of the proposed rule does not have a 
significant effect on small, FDIC-supervised institutions directly 
affected by the proposed rule.
---------------------------------------------------------------------------

    \17\ Estimated total hourly compensation of Financial Analysts 
in the Depository Credit Intermediation sector as of December 2018. 
The estimate includes the May 2017 75th percentile hourly wage rate 
reported by the Bureau of Labor Statistics, National Industry-
Specific Occupational Employment, and Wage Estimates. This wage rate 
has been adjusted for changes in the Consumer Price Index for all 
Urban Consumers between May 2017 and December 2018 (3.59 percent) 
and grossed up by 50.83 percent to account for non-monetary 
compensation as reported by the December 2018 Employer Costs for 
Employee Compensation Data.
    \18\ FDIC Call Report, December 31st, 2018.
---------------------------------------------------------------------------

    This proposed rule would likely increase capital requirements for 
some land development loans, which could potentially decrease the 
volume of this type of lending by small, FDIC-supervised institutions. 
The FDIC believes that this effect will likely be small given that the 
amendments only affect a subset of residential construction loans, 
which represent a small portion of total assets for most small, FDIC-
supervised institutions. Going forward, institutions also could have an 
incentive to shift their loan mix away from credit facilities that 
finance land development without any construction of one- to four-
family residential properties. Increases in required capital could 
enhance the ability of small, FDIC-supervised institutions to withstand 
an economically stressful scenario. This effect would only be relevant 
for a small number of institutions with material exposures to the types 
of loans covered by the proposed rule.
    The baseline for analysis of the expected effects of the proposed 
rule on small entities is the current regulatory definition of HVCRE 
and the interagency statement.\19\ However, as described previously, 
this NPR expands upon the HVCRE NPR. The HVCRE NPR revises the 
definition of HVCRE exposure in the regulatory capital rule to conform 
to the statutory definition of ``high volatility commercial real estate 
acquisition, development, or construction (HVCRE ADC) loan,'' in 
accordance with section 214 of the Economic Growth, Regulatory Relief, 
and Consumer Protection Act (EGRRCPA). If the total expected effects of 
the proposed rule and the HVCRE NPR were considered together they are 
likely to result in a reduction in risk weighted assets for affected 
institutions.
---------------------------------------------------------------------------

    \19\ Board, FDIC, and OCC, Interagency statement regarding the 
impact of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180706a1.pdf. (last visited August 21, 
2018).
---------------------------------------------------------------------------

    Based on this supporting information, the FDIC does not believe 
that the proposed rule will have a significant economic impact on a 
substantial number of small entities.
    The FDIC invites comments on all aspects of the supporting 
information provided in this section, and in particular, whether the 
proposed rule would have any significant effects on small entities that 
the FDIC has not identified.

C. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \20\ requires the Federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The agencies have sought to present 
the proposed rule in a simple and straightforward manner, and invite 
comment on the use of plain language. For example:
---------------------------------------------------------------------------

    \20\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
---------------------------------------------------------------------------

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

D. OCC Unfunded Mandates Reform Act of 1995 Determination

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

[[Page 35350]]

sector, of $100 million or more in any one year. Accordingly, the OCC 
has not prepared a written statement to accompany this proposed rule.

E. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\21\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
insured depository institutions, each Federal banking agency must 
consider, consistent with principles of safety and soundness and the 
public interest, any administrative burdens that such regulations would 
place on depository institutions, including small depository 
institutions, and customers of depository institutions, as well as the 
benefits of such regulations. In addition, section 302(b) of RCDRIA 
requires new regulations and amendments to regulations that impose 
additional reporting, disclosures, or other new requirements on insured 
depository institutions generally to take effect on the first day of a 
calendar quarter that begins on or after the date on which the 
regulations are published in final form.\22\
---------------------------------------------------------------------------

    \21\ 12 U.S.C. 4802(a).
    \22\ Id.
---------------------------------------------------------------------------

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

List of Subjects

12 CFR Part 3

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

12 CFR Part 217

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

12 CFR Part 324

    Administrative practice and procedure, Banks, Banking, Capital 
adequacy, Capital requirements, Asset Risk-weighting methodologies, 
Reporting and recordkeeping requirements, State savings associations, 
State non-member banks, Risk.

Office of the Comptroller of the Currency

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

PART 3--CAPITAL ADEQUACY STANDARDS

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

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

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


Sec.  3.2   Definitions.

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

[[Page 35351]]

exposure definition and with respect to a credit facility and a 
national bank or Federal savings association, a national bank or 
Federal savings association may reclassify an HVCRE exposure as a non-
HVCRE exposure upon--
    (i) The substantial completion of the development or construction 
of the real property being financed by the credit facility; and
    (ii) Cash flow being generated by the real property being 
sufficient to support the debt service and expenses of the real 
property, in accordance with the national bank's or Federal savings 
association's applicable loan underwriting criteria for permanent 
financings.
    (7) For purposes of this definition, 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 in paragraph 
2(i)(A).
* * * * *

Board of Governors of the Federal Reserve System

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

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

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

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

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


Sec.  217.2  Definitions.

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

Federal Deposit Insurance Corporation

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

PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

Subpart A--General Provisions

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

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i),

[[Page 35352]]

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

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


Sec.  324.2  Definitions.

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

    Dated: June 10, 2019.
Joseph M. Otting,
Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System, July 11, 2019.

Michele Taylor Fennell,
Assistant Secretary of the Board.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on June 7, 2019.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019-15332 Filed 7-22-19; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P