Agencies to propose excluding some residential loans from HVCRE definition

Excluding certain loans that finance land development of single- and multi-family residences from the definition of “high volatility commercial real estate” (HVCRE) in their regulatory capital rules is under consideration by the three federal banking agencies in a regulatory proposal.

In a notice scheduled for publication in the Federal Register, the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, and the Office of the Comptroller of the Currency (OCC) proposed adding language to the definition of HVCRE exposure that the one-to-four-family residential property exclusion 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 structures.

The agencies said in the notice that the latest proposal is intended to clarify an earlier notice of proposed rulemaking (NPR) issued last September for HVCRE acquisition, development or construction loans. The three regulators said their review of comments on that proposal led to the latest issuance.

“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 notice states. “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.”

The agencies said the latest proposed rulemaking 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.

The proposal will be issued for a 30-day comment period.

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