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Federal Register / Vol. 86, No. 163 / Thursday, August 26, 2021 / Proposed Rules or to have an exposure to that property or project. This is a risk-weighting regulation only.11 System scope and eligibility authorities are contained in other provisions of our regulations and in the Farm Credit Act of 1971, as amended Act.12
A. Scope of HVCRE Exposure Definition
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As the FBRAs did, we propose to define an HVCRE exposure as a credit facility secured by land or improved real property that meets three criteria and that does not meet any of the definitions exclusions, which are discussed below.13 The FBRAs defined this term in a manner that is consistent with the definition of a loan secured by real estate in their Call Report forms and instructions. In that definition, a loan is secured by real estate if the estimated value of the real estate collateral at origination after deducting all senior liens held by others is greater than 50 percent of the principal amount of the loan at origination.
We propose to adopt the same meaning of a credit facility secured by land or improved real property as the FBRAs have adopted. Therefore, for example, if an institution makes a loan to construct and equip a building, and the loan is secured by both the real estate and the equipment, the institution must estimate the value of the building, upon completion, and of the equipment.
If the value of the building is greater than 50 percent of the principal amount of the loan at origination, the loan would be a loan secured by real estate, and it would therefore be a credit facility secured by land or improved real property. 14 If the value of the building, upon completion, is less than 50 percent of the principal amount of the loan at origination, it would not be a loan secured by real estate, and it would therefore not be a credit facility secured by land or improved 11 As stated in the preamble to the Tier 1/Tier 2
Capital Framework final rule, We remind System institutions that the presence of a particular risk weighting does not itself provide authority for a System institution to have an exposure to that asset or item. See 81 FR 49719, 49722 July 28, 2016.
12 There may be overlap between HVCRE
exposures and exposures to land in transition agricultural land in the path of development.
System institutions contemplating land in transition financing must review and understand FCA Bookletter BL058 and must ensure they are in full compliance with all FCA regulations.
13 FCA regulation 614.4240q defines real property as all interests, benefits, and rights inherent in the ownership of real estate.
14 A determination that a loan is a credit facility secured by land or improved real property does not mean that the loan is necessarily an HVCRE
exposure. As mentioned above, a loan also has to satisfy three criteria, and not be subject to an exclusion, to be an HVCRE exposure.

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real property. Accordingly, it would not be an HVCRE exposure.
Under our proposal, a credit facility secured by land or improved real property would not be classified as an HVCRE exposure unless it met the following three criteria. If such a credit facility did not meet all three criteria, it would not be an HVCRE exposure. First, the credit facility must primarily finance or refinance the acquisition, development, or construction of real property. Second, the purpose of the credit facility must be to provide financing to acquire, develop, or improve such real property into incomeproducing property. Finally, the repayment of the credit facility must depend upon the future income or sales proceeds from, or refinancing of, such real property.
The first criterion is that the credit facility must primarily finance or refinance the acquisition, development, or construction of real property. This criterion is satisfied if more than 50
percent of the proposed use of the loan funds is for the acquisition, development, or construction of real property. The criterion is not satisfied if 50 percent or less of the proposed use of the loan funds is for the acquisition, development, or construction of real property.
The second criterion is that the credit facility has the purpose of providing financing to acquire, develop, or improve the real property into incomeproducing property.
The third criterion is that the credit facility is dependent for repayment upon future income or sales proceeds from, or refinancing of, the real property. This criterion narrows the scope of the definition of HVCRE
exposure from the definition we proposed in 2014. The definition we proposed in 2014 would have included within the scope of HVCRE exposures credit facilities for which repayment would be from the ongoing business of the borrower, as well as credit facilities that were dependent for repayment upon future income or sales proceeds.
The Farm Credit Council and several System banks and association commenters expressed concern with the breadth of this definition from the 2014
proposal.15 This proposal addresses that concern, since credit facilities that will be repaid from the borrowers ongoing business would not be classified as an HVCRE exposure. We believe that a majority of System loans are repaid from the borrowers ongoing business rather 15 See e.g., Farm Credit Council comment letter, Regulatory Capital, Implementation of Tier1/Tier2
Framework, dated February 13, 2015.

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than from future income or sales proceeds, and therefore that a majority of potential System HVCRE exposures would not meet this criterion and would not be HVCRE exposures.
B. Exclusions From HVCRE Exposure Definition Under this proposal, the exposures described in the following paragraphs would be excluded from the definition of HVCRE exposure:
1. Oneto Four-Family Residential Properties Under this proposal, as in the FBRA
rule, an HVCRE exposure would not include a credit facility financing the acquisition, development, or construction of properties that are oneto four-family residential properties, provided that the dwelling including attached components such as garages, porches, and decks represents at least 50 percent of the total appraised value of the collateral secured by the first or subsequent lien.
Manufactured homes permanently affixed to the underlying property, when deemed to be real property under state law, would qualify for this exclusion, as would construction loans secured by single family dwelling units, duplex units, and townhouses.
Condominium and cooperative construction loans would qualify for this exclusion, even if the loan is financing the construction of a building with five or more dwelling units, as long as the repayment of the loan comes from the sale of individual condominium dwelling units or individual cooperative housing units. This exclusion would apply to all credit facilities that fall within its scope, whether rural home financing under 613.3030 or oneto four-family residential property financing under 613.3000b. Similar to the reduced risk-weight assigned to residential mortgage exposures under 628.32g1, a credit facility would qualify for this exclusion only if the property securing the credit facility exhibits characteristics of residential property rather than agricultural property including, but not limited to, the requirement that the dwelling including attached components such as garages, porches, and decks represents at least 50 percent of the total appraised value of the collateral secured by the first or subsequent lien. If examiners determined that the property was not residential in nature, the credit facility would not qualify for this exclusion.
Loans for multifamily residential property construction such as apartment buildings where loan repayment is dependent upon
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