OCC Bulletin 2018-34| September 28, 2018
High Volatility Commercial Real Estate: Notice of Proposed Rulemaking
Chief Executive Officers of All National Banks and Federal Savings Associations, Department and Division Heads, All Examining Personnel, and Other Interested Parties
The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) are seeking comment on a proposed rule that would, in accordance with section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), revise the capital rules to make the definition of high volatility commercial real estate (HVCRE) exposure consistent with the new statutory definition of a high volatility commercial real estate acquisition, development, or construction (HVCRE ADC) loan. Going forward, the capital rule would continue to contain a single definition of HVCRE that would be applicable under both the standardized approach and the advanced approaches. The proposed rule also seeks comment on whether the banking agencies should further clarify the new definition.
Note for Community Banks
The proposed rule would apply to all national banks and federal savings associations (collectively, banks), including community banks.
- The agencies are proposing to revise the HVCRE exposure definition to make it consistent with the new statutory definition of an HVCRE ADC loan. Section 214 of the EGRRCPA states the agencies may only require a depository institution to assign a heightened risk weight to an HVCRE exposure, as defined under the capital rule, if such exposure is an HVCRE ADC loan as defined under the EGRRCPA. The statutory definition also excludes any loan made before January 1, 2015.
- The new definition differs from the existing definition primarily in two ways:
- First, the existing definition applies to loans that finance ADC activities, whereas the new definition would apply only to loans that “primarily” finance ADC activities and that are secured by land or improved real estate. This change would exclude multipurpose credit facilities that primarily finance the purchase of equipment or other non-ADC activities from the definition of HVCRE.
- Second, while both the existing and the new definitions exclude financing for projects to which the borrower has contributed at least 15 percent equity, the existing definition permits only the purchase price of contributed land to be counted for this purpose. The new definition allows the full appraised value of borrower-contributed land (less the total amount of any liens on the real property securing the HVCRE exposure) to be counted as part of the equity contribution.
- When possible, the agencies have attempted to clarify their interpretations of certain terms and are requesting comment on them. The preamble to the proposed rule describes how the agencies interpret exemptions from the HVCRE ADC loan definition for
- loans that finance one- to four-family residential properties, interpreted broadly to include lot development loans.
- loans that finance community development projects, interpreted consistently with the agencies’ regulations implementing the Community Reinvestment Act.
- loans to purchase agricultural land, interpreted consistently with call report instructions for reporting loans that finance “farmland.”
- loans that finance projects that have been completed and have begun to produce income. Such financing is exempt from the definition of HVCRE ADC loan if it satisfies the banking organization’s internal underwriting criteria for permanent financing.
In 2013, the agencies adopted a revised regulatory capital rule (capital rule) that, among other things, addressed weaknesses in the regulatory framework that became apparent in the financial crisis of 2007-2008. The capital rule strengthened the capital requirements applicable to banking organizations supervised by the agencies by improving both the quality and quantity of regulatory capital and increasing risk sensitivity. To better capture the risk of certain kinds of real estate exposures, the capital rule defined HVCRE. Those exposures consisted of certain ADC loans shown to have increased risk characteristics relative to other ADC exposures, and thus were assigned a heightened risk weight under the capital rule.
On May 24, 2018, the EGRRCPA became law. Section 214 of the EGRRCPA amends the Federal Deposit Insurance Act by adding a new section 51 to provide a definition of an HVCRE ADC loan. The statute states the agencies may only require a depository institution to assign a heightened risk weight to an HVCRE exposure, as defined under the capital rule, if such exposure is an HVCRE ADC loan under the EGRRCPA. The statutory HVCRE ADC loan definition excludes any loan made before January 1, 2015. Section 214 was effective upon enactment of the statute.
Please contact Benjamin Pegg, Risk Expert, Capital Policy Division, at (202) 649-6370; or Carl Kaminski, Special Counsel, or Rima Kundnani, Attorney, Chief Counsel’s Office, at (202) 649-5490.
Acting Senior Deputy Comptroller and Chief Counsel